Which of the following positions results in synthetic fixed-rate debt? A) A short position in a floating-rate note combined with a pay-fixed interest rate swap. B) A long position in a floating-rate note combined with a pay-fixed interest rate swap. C) A long position in a floating-rate note combined with a receive-fixed interest rate swap.
A
B
A
Sorry, Shall be B. Because “debt” shall pay not receive floating.
AMA Wrote: ------------------------------------------------------- > Sorry, Shall be B. Because “debt” shall pay not > receive floating. Shall be A. My brain is messed up.
hellscream Wrote: ------------------------------------------------------- > Which of the following positions results in > synthetic fixed-rate debt? > > A) A short position in a floating-rate note > combined with a pay-fixed interest rate swap. > B) A long position in a floating-rate note > combined with a pay-fixed interest rate swap. > C) A long position in a floating-rate note > combined with a receive-fixed interest rate swap. dont like the way this is worded …u end up being short fixed rate here …which to me means u have become a fixed rate bond issuer not holder
Cash flows of A: Pay Floating to Bond holders, Receive Floating Derivatives Dealer, Pay Fixed to Derivatives Dealer. Net Flows: Pay Fixed. Cash flows of B: Receive Floating from Bond, Pay Derivatives Dealer Fixed, Receive Floating Derivatives Dealer. Net Flows…bad. Receive 2x Floating, Pay Fixed. Leveraged Floater? Cash flows of C: Receive Floating from Bond, Pay Derivatives Dealer Floating, Receive Derivatives Fixed. Net Flows: Receive Fixed. Both A and C have created synthetic fixed rate debt, one as the issuer, one as the holder. I am going with C as the holder of the debt.
Paraguay Wrote: ------------------------------------------------------- > Cash flows of A: Pay Floating to Bond holders, > Receive Floating Derivatives Dealer, Pay Fixed to > Derivatives Dealer. Net Flows: Pay Fixed. > > Cash flows of B: Receive Floating from Bond, Pay > Derivatives Dealer Fixed, Receive Floating > Derivatives Dealer. Net Flows…bad. Receive 2x > Floating, Pay Fixed. Leveraged Floater? > > Cash flows of C: Receive Floating from Bond, Pay > Derivatives Dealer Floating, Receive Derivatives > Fixed. Net Flows: Receive Fixed. > > Both A and C have created synthetic fixed rate > debt, one as the issuer, one as the holder. > > I am going with C as the holder of the debt. well reasoned and i agree the question says u are long the fixed rate instrument and as u clearly outlined C is the answer
Agree with Paraguay. Going with C.
Paraguay Wrote: ------------------------------------------------------- > Both A and C have created synthetic fixed rate > debt, one as the issuer, one as the holder. > > I am going with C as the holder of the debt. Doesn’t “debt” means “from the perspective of issuer” ?
alta168 Wrote: ------------------------------------------------------- > Paraguay Wrote: > -------------------------------------------------- > ----- > > Both A and C have created synthetic fixed rate > > debt, one as the issuer, one as the holder. > > > > I am going with C as the holder of the debt. > > Doesn’t “debt” means “from the perspective of > issuer” ? no u can be long or short debt
alta168 Wrote: ------------------------------------------------------- > Paraguay Wrote: > -------------------------------------------------- > ----- > > Both A and C have created synthetic fixed rate > > debt, one as the issuer, one as the holder. > > > > I am going with C as the holder of the debt. > > Doesn’t “debt” means “from the perspective of > issuer” ? No, purchases are also made in debt markets. At best this question is ambiguous. Obviously writer of this question needed three answers and accidentally made two that worked. There is simply going to be an assumption either way. A should say issue in my opinion or the question should ask “issue synthetic debt or purchase synthetic debt.” What is the QBank number?
question should read Which of the following positions results in being long (short) synthetic fixed-rate debt? in which case long would be C and short A
pimpineasy Wrote: ------------------------------------------------------- > alta168 Wrote: > -------------------------------------------------- > ----- > > Paraguay Wrote: > > > -------------------------------------------------- > > > ----- > > > Both A and C have created synthetic fixed > rate > > > debt, one as the issuer, one as the holder. > > > > > > I am going with C as the holder of the debt. > > > > Doesn’t “debt” means “from the perspective of > > issuer” ? > > > no u can be long or short debt IMO, from the perspective of issuer, the pay-fixed bond is a debt (liability). But from the perspective of holder, it shall be an asset.
alta168 Wrote: ------------------------------------------------------- > pimpineasy Wrote: > -------------------------------------------------- > ----- > > alta168 Wrote: > > > -------------------------------------------------- > > > ----- > > > Paraguay Wrote: > > > > > > -------------------------------------------------- > > > > > > ----- > > > > Both A and C have created synthetic fixed > > rate > > > > debt, one as the issuer, one as the holder. > > > > > > > > I am going with C as the holder of the > debt. > > > > > > Doesn’t “debt” means “from the perspective of > > > issuer” ? > > > > > > no u can be long or short debt > > IMO, from the perspective of issuer, the pay-fixed > bond is a debt (liability). But from the > perspective of holder, it shall be an asset. It is good logic. My guess is this was posted because the original poster realized both A and C were right. CFAi is generally not ambiguous in their question design. This probably would not be on the test so it is moot.
Paraguay Wrote: ------------------------------------------------------- > Cash flows of A: Pay Floating to Bond holders, > Receive Floating Derivatives Dealer, Pay Fixed to > Derivatives Dealer. Net Flows: Pay Fixed. > > Cash flows of B: Receive Floating from Bond, Pay > Derivatives Dealer Fixed, Receive Floating > Derivatives Dealer. Net Flows…bad. Receive 2x > Floating, Pay Fixed. Leveraged Floater? > > Cash flows of C: Receive Floating from Bond, Pay > Derivatives Dealer Floating, Receive Derivatives > Fixed. Net Flows: Receive Fixed. > > Both A and C have created synthetic fixed rate > debt, one as the issuer, one as the holder. > > I am going with C as the holder of the debt. Thanks for the post. For some reason I didn’t pickup that there are 3 separate flows here. Makes sense now.
it is B… Pay Fix Swap so you would get Floating Rate Payment -----> use floating rate payment to pay the company floating rate payment -----> net result is fix payment
golfer Wrote: ------------------------------------------------------- > it is B… > > Pay Fix Swap so you would get Floating Rate > Payment -----> use floating rate payment to pay > the company floating rate payment -----> net > result is fix payment Can’t be B…you would be receiving a Floating rate payment from the long note, plus receiving a Floating rate payment from the swap, and paying a fixed rate. Notice that your floating rate payments don’t net out if you took that position.
Man, this is Q of today…I’m exhausted and see this Q… The diagram didn’t help much…I’ll choose C. What’s answer?