Question

My bank has a larger number of adjustable-rate mortgage loans outstanding. To protect our interest rate income on these loans the bank could

I. enter into a swap to pay fixed and receive variable.
II. enter into a swap to pay variable and receive fixed.
III. buy an interest rate floor.
IV. buy an interest rate cap.
A. I and III only
B. I and IV only
C. II and III only
D. II and IV only

Answer 1

The answer is: C) II and III only

II. enter into a swap to pay variable and receive fixed.

III. buy an interest rate floor.

Step-by-step explanation:

A swap refers to a derivative contract between two parties that exchange financial instruments, usually cash flows.

An interest rate floor refers to an agreement between the seller of a loan product and an investor that guarantees a minimum rate of return.