Which of the following is true for the party paying fixed in an interest rate swap?
A) There is more credit risk when the yield curve is upward sloping than when it is downward sloping
B) There is more credit risk when the yield curve is downward sloping than when it is upward sloping
C) The credit exposure increases when interest rates decline
D) There is no credit exposure providing a financial institution is used as the intermediary

Question

Quizplus · Accepted Answer

There is more credit risk when the yield curve is upward sloping than when it is downward sloping because the party paying fixed is exposed to the risk that interest rates will rise, which will increase the value of the floating rate leg of the swap and decrease the value of the fixed rate leg.

Which of the Following Is True for the Party Paying