The question is to say if this statement is correct:
“By entering into the swap, the duration of Worth’s long-term liabilities will become smaller, causing the value of the firm’s equity to become more sensitive to interest rate changes.”
My call was: equity? Interest rate sensitive? Don’t think so.
WRONG.
Since Worth issues fixed-rate debt, the firm has negative duration exposure. Because the bonds issued have a maturity of 15 years, the duration exposure is substantial. The exact magnitude of the duration is not necessary to answer the question. Adding the swap position, which has positive duration, reduces Worth’s duration exposure, making the firm’s liabilities less sensitive to interest rate changes. Since the swap will not affect the duration of the firm’s assets, the duration of the firm’s equity must offset the decrease in the duration of the liabilities. Thus, the duration of Worth’s equity will increase and become more sensitive to interest rate changes.
Can anyone explain that? I don’t get it. Especially the last sentence doesn’t help me much. Howcome will duration of the firm’s equity increase?作者: hanvinh 时间: 2013-4-13 23:39
I didn’t do this exam. What kind of swap was it?作者: cross-ied 时间: 2013-4-13 23:39
