If the yield curve is inverse, in a newly arranged interest rate swap:
A)the floating-rate payer will expect to receive the first swap cash settlement
B)the first swap cash settlement is expected to be zero
C)the swap cash settlements are expected to increase each period
D)the fixed rate payer will expect to pay the later swap cash settlements
E)the cash settlements will be expected to fluctuate randomly from quarter to quarter.

Question

Quizplus · Accepted Answer

In an inverse yield curve environment, short-term interest rates are higher than long-term interest rates. As a result, the fixed rate in the interest rate swap will be higher than the floating rate, and the fixed rate payer will expect to pay the later swap cash settlements. Therefore, the correct choice is D.

If the Yield Curve Is Inverse, in a Newly Arranged