plain vanila swap question

CFA Level I
#1

which of the fllowing transcation is the most appropriate strategy for a fixed income portfolio manager under the anticipation of an economic expansion? A enter a pay floating, receive fixed rate swap B. enter a payfixed, receive floating rate swap c. sell corporate bonds and buy treasury bonds d buy corporate bonds and sell treasury bonds

#2

D

#3

is there a clear relationship between economics expansion and interest rate level? why D?

#4

You will buy a corporate bond during expansions since u think the company will do good and its earnings will be higher. What is the ans to this one btw

#5

it is D. you are right

#6

what about B? rates go up, his bonds pay fixed amount, and can’t sell them because their price goes down… so he pays the fixed, receives floating

#7

that is what i thought too! I chose B. that is why i asked the question if there is a definite relationship between economic expansion and interest rate level

#8

I like B better. Economic expansion means more demand for money which generally (not always) means interest rates up. Playing credit spreads to tighten just because default risk is down doesn’t sound like a good game to me. Increased demand for money makes interest rates up which generally means credit spreads up too.

#9

the answer says D because the difference between the corporate bond rate and treasury rate will narrow, which means corpoprate will have less credit risk now. I do not see why this can make corporate bond a buy

#10

I definitely would have gotten this one wrong… So the premise behind D is that the corporate bonds higher yields are more attractive when business conditions are better, even though the yields come down a little (due to decreasing credit spread)?