) WITH REGARD TO THE USE OF AN INTEREST RATE SWAP, IS BAZLAMIT CORRECT WITH REGARD TO THE TYPE OF INTEREST RATE SWAP AND THE EFFECT ON INTEREST SENSITIVITY OF THE OVERALL POSITION

3.) With regard to the use of an interest rate swap, is Bazlamit correct with regard to the

type of interest rate swap and the effect on interest sensitivity of the overall position?

A.

Type of interest rate swap: YES and Interest Rate Sensitivity: YES

B.

Type of interest rate swap: NO and Interest Rate Sensitivity: NO

C.

Type of interest rate swap:YES and Interest Rate Sensitivity: NO

Answer = C

Bazlamit is correct with regard to the type of interest rate swap but incorrect with

regard to the impact of the swap on the interest rate sensitivity of the overall position.

Because Viewmont Corporation has a variable rate loan, entering into an interest rate

swap to pay a fixed receive a variable interest rate would stabilize cash outflows and

thus hedge the firm's interest rate risk. But, the swap converts the variable rate loan to

a fixed rate loan. Because the duration of the fixed-rate loan will exceed the duration of

the variable rate loan, the interest rate sensitivity of the overall position increases.

“Risk Management Applications of Swap Strategies,” by Don M. Chance