With a pure pickup yield swap

Question

Quizplus · Accepted Answer

A pure pickup yield swap involves exchanging bonds with different yields to maturity but similar risk characteristics. The key to this swap is that the bond prices of one or both bonds have to be in disequilibrium, meaning their market prices do not accurately reflect their true value. Therefore, the swap is based on the expectation that the bond prices will eventually return to their equilibrium levels, allowing the investor to profit from the difference in yield. Choice A is not accurate as the swap does not involve selling and buying different bonds to decrease the yield to maturity. Choice B is not accurate as the swap assumes that the market is not perfectly efficient.

With a Pure Pickup Yield Swap