Question

Which of the following statements is FALSE?

Select one:

A. In a standard interest rate swap, one party agrees to pay coupons based on a fixed interest rate in exchange for receiving coupons based on the prevailing market interest rate during each coupon period.

B. An interest rate swap is a contract entered into with a bank, much like a forward contract, in which the firm and the bank agree to exchange the coupons from two different types of loans.

C. If short-term interest rates were to fall while long-term rates remained stable, then short-term securities would fall in value relative to long-term securities, despite their shorter duration.

D. The swap contract—like forward and futures contracts—is typically structured as a "zero-cost" security.

Answer 1

If short term interest rates were to rise while long term rates remained stable ,then short term securities would fall in value relative to long term securities,despite their shorter duration.

So statement ( C.) is false as it states that If short-term interest rates were to fall while long-term rates remained stable, then short-term securities would fall in value relative to long-term securities, despite their shorter duration as it advocates for falling interest rates.

Statement D The swap contract like forward and futures contract is typically structured as a "zero-cost" security and this statement is true as well as statement B which is also true as it states that An interest rate swap is a contract entered into with a bank, much like a forward contract, in which the firm and the bank agree to exchange the coupons from two different types of loan.

Statement A is also true as Standard IRS means that exchange of interest rates between two parties.

SO only false statement is statement C.