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Steepeners / CMS Spread Notes
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As an investor, you have a clear opinion about the future deve-lopment of short- and long-term interest rates. In purchasing CMS Spread Notes, you anticipate that during the term, the long-term interest rates will remain higher than those of the short term (the normal interest rate curve). As long as this expectation is fulfilled, you can benefit from an attractive interest return, depending on the structure of the product.
Solution suggestion 1: CMS Spread Note with anticipation of a normal interest rate curve
You expect that during the term, there will be a positive difference between the short- and long-term interest rates, e.g. the 20-year and 2-year SWAP rate. As long as this is fulfilled, an attractive coupon is paid out. In periods with a negative interest rate diffe-rence (an inverse interest rate curve), no coupon is paid out.
- In most cases, the issuer has the right to terminate the product (a so-called call). This means that the conditions of the product can be improved.
Solution suggestion 2: CMS Spread Note with anticipation of a steep interest rate curve
You expect that during the term, there will be a positive difference between the short- and long-term interest rates. The half-yearly coupon now amounts, for example, to 4 times the difference between the 20-year and the 2-year SWAP rate. The higher the difference is between the short- and long-term rates, the higher is the coupon that is paid out.
- In most cases, the issuer has the right to terminate the product (a so-called call). This means that the conditions of the product can be improved.
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