Synthetic floating rate debt

CFA Level III Derivatives
#1

Dear all,

Could someone please help me understand the correct answer to the below schweser pro qid:

Question ID#:91566

Which of the following positions results in synthetically issuing floating-rate debt?

Answer: A short position in a fixed-rate bond combined with a receive-fixed interest rate swap.

The way I understand it works is

If I have am long a Fixed rate bond on my balance, then I need to pay Fixed rate interest on the bond.

So I am long the Fixed rate bond and short for the interest outflows on every settlement period. Now to convert the position to a ‘Synthetic floating rate debt’.

I will take receive Fixed and pay floating swap.

So the position would result in

A long position in a fixed-rate bond combined with a receive-fixed interest rate swap.

But the answer in the schweser pro is different.

Can anyone please clarify.

Thank you

#2

You issue (short) fixed rate debt so you pay a fixed coupon, if you want to turn this into a floating rate liability you will need to enter into a receive fixed swap.

#3

If you’re long a fixed rate bond, you own it, so you _ receive _ a fixed rate.

If you’re short a fixed rate bond, you _ pay _ a fixed rate: you issued the bond.

#4

S2000magician.

So in summary, since I have fixed rate liability bond on my balance, I am short the fixed rate payment.

Kindly reassure.

Thank you

#5

That’s correct.

Thus, if you think floating rates will decline, you enter into a receive fixed, pay floating swap.