Heinz Blasnik- Views You Can Use Message Board

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Strategies & Market Trends : Heinz Blasnik- Views You Can Use

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To: Perspective who wrote (2600)	6/24/2003 12:54:37 AM
From: LLCF	Read Replies (1) of 4904

<Finally somebody manages to explain to me, clearly, how all those interest rate swaps work. > <Many U.S. corporations have swapped their long-term (fixed interest rate) debt into short-term (floating interest rate), to the extent that an increase in short-term rates could substantially raise default risks. Similarly, a growing proportion of homeowners have refinanced their mortgages into adjustable rate structures that are also sensitive to higher short-term yields.> It's simply a contract made with another party 'swapping' one cash flow [say 3mo t-bills over a 10 year period] for another [10 year bond]. If done today it's simply done at prevailing rates today... then as the value of each flow changes you have a winner.............. and loser. Who in their right mind would float a 10 or 20 year bond, and then swap their liability to libor or t-bills??? An insane manic looking to boost earnings??? Who knows, but the insane part looks about right. DAK

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