Interest rate is declining. For an investor owning a callable bond , to remove the call feature, would entering a receive fixed swap work?
I understand that when interest rate declines, callable bond’s upside is capped due to the short call. So, if I long a receiver swaption, it would work, but if I directly enter a receive fixed swap, would it still work?
As an investor, you are long the bond and short the call. To remove the call feature, you have to go long the call (swapation).
This can be done by buying a receive swapation. If you enter the swap directly, it would not work because by the time the interest rates are decline, the market rate of the swap will be different. If you entere into the swap currently, the rates will be mis-matched as well. It would be same thing as buying a market rate bond.