Why might a manager consider using an interest-rate in which the notional principal amount declines over time?

Question

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?

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.