1. If you anticipate the equity market will beat the bond market for the next five years, what swap would you find attractive to contract upon and why.
2. Assuming that you anticipate that the equity markets will outperform the bond markets in the period of three years from today for another three years, what swap is appropriate and why?
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When I expect the equity market to outperform the bond market I would contract to a debt equity swap. A debt equity swap occurs when a company changes its financial structure and it exchanges its debt for a certain amount of equity (Over Leveraged, 2009). The value of the swap is evaluated using the current conditions in the market but organizations usually amounts higher than the market value in order to encourage shareholders and debt holders to take part in the swap. The company then eliminates the previous asset category and introduces the newly acquired asset category (Over Leveraged, 2009).
I would contract to debt equity swap because ...
Bond markets being better than equities or equities better than bonds are examined.