An interest rate swap to synthetically convert fixed rate interest on a held-to-maturity bond investment into floating rate interest:
A)Represents a cash flow hedge.
B)Represents a fair value hedge.
C)Represents a foreign currency hedge.
D)Does not qualify as a hedge.

Question

Quizplus · Accepted Answer

An interest rate swap used to convert fixed rate interest into floating rate interest on a held-to-maturity bond is a fair value hedge, as it is used to hedge the exposure to changes in the fair value of the bond due to interest rate fluctuations.

An Interest Rate Swap to Synthetically Convert Fixed Rate Interest