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Say swap would be used to convert the payments of its portfolio of fixed-rate residential mortgage loans into a floating payment. Why might a manager consider using an interest-rate in which the notional principal amount declines over time?

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1 Answer 1

  • Maybe because the underlying portfolio's notional may decrease over time?
  • Maybe because the loans are part of a private transaction in which the deal stipulates that notional is paid off over time?
  • Maybe its a pay-through structure in which the original mortgage loan notional is paid off over time and the notional portions are passed down the structure.

There can be a million reasons but to answer your question very directly:

The manager would engage in such swap in order to match the decreasing notional of the underlying loan portfolio. Simple as that. Life is often not that complicated.

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