Munaf Usmani Academia Research 1st March 2011 Interest Rate Yield Curve and How Banc One's Interest Swaps Impact the Curve When we’re talking about the interest rate yield curve for Banc One Corporation, we imply the realized rate of return it is generating from net investments…
These swaps had a significant impact on their portfolio. Initially, they engaged in fixed-receiving IRSs’ which provided them with an above-market return or implied yield. In this case, swaps assisted them in generating higher returns, and thus its yield curve witnessed an upward shift. However, this yield curve would be flat as the rate is fixed. Also, it is shift in the implied yield rather than a rising slope because the tenure of the investment remained the same. After this, Banc One changed gears and opted for investing in short-term floating rate instruments and then entering into medium-term receive-fixed swaps. This again boosted the yield for the corporation, and at the same time provided liquid investments. The advantages of this structured product greatly outweighed the disadvantages. As part of its ongoing strategy to invest in CMOs’, the bank began to consider the development of a synthetic swap which would cater to the CMO investments which Banc One had made. Amortized Interest Rate Swaps were introduced. In this derivative, the bank was receiving a fixed rate and paying a floating rate. However, there was a risk of prepayments of the mortgages in which the bank had invested in. If the interest rates were to fall, the amortization of the CDOs’ would increase rapidly and the bank would find itself with funds to reinvest in a depressed market. ...
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