Not sure if it is my lack of sleep, but I don’t understand the answer. If Barter is entering swap as a fixed PAYER doesn’t that lower is duration and thus lower the market value risk?
If he becomes FIXED payer - his DURATION Increases. Floating always has the smaller duration.
Market Value Risk - vs. Cash Flow risk - is always a confusion.
Cash Flow risk is now reduced - this is because what was once a Floating payment is now converted into a Fixed Payment.
Market Value Risk actually increases - anytime with a Fixed payment. Remember that by virtue of being a floating period item - it would RESET to par at every periodic date (6 months e.g.). But now - it is subjected to the interest rate environment - rises when rates fall, drops when rates rise. So Market value will fluctuate.
Is the difference because they are the issuer of the debt instead of the holder of the bond?
Cause if they were the holder of the bond (investor) and he enters a swap receiving float and paying fixed it is ia negative duration position, correct?
Duration of swap position = DUR of what you RECEIVE minus DUR of what you PAY is the equation I have burned into my brain.
deleted…realized that the bond was being issued.
he is becoming the fixed PAYER on the swap. So he is making the fixed payment and receiving floating.
So - Small + Big … Duration INCREASED.