Flashcard Set Preview
| Side A | Side B | ||
| 1 |
Cash flow risk is a concern with
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floating-rate instruments.
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| 2 |
Since their
cash flows are reset each period according to the prevailing rate at the
beginning...
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only minor
changes.
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| 3 |
Market value risk is a concern with
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fixed-rate instruments.
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| 4 |
The cash
flows to fixed rate instruments are set at inception, so there is no uncertainty...
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amount of each cash flow.
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| 5 |
When a floating-rate borrower converts his/her loan to a fixed rate with a
swap, the risk...
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one risk for another.
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| 6 |
Now the value of the synthetic fixed-rate loan will
rise and fall in value as interest rates
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fall and rise.
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| 7 |
Of course, what happens
is that the value of the original loan retains its stability, but...
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changes in
interest rates.
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| 8 |
A decline in interest rates, for example, increases the liability of the
borrower because...
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increase in the value of the pay-fixed side of the swap
(the liability).
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