Answer: An interest rate swap paying fixed and receiving LIBOR plus a spread

The correct answer is C: An interest rate swap paying fixed and receiving LIBOR plus a spread. This is because the manager is looking to change the fund's interest rate exposure by investing in fixed-income securities with negative duration. A position with negative duration will decrease in value as interest rates fall and increase in value as interest rates rise. An interest rate swap where the manager pays a fixed rate and receives LIBOR plus a spread will indeed increase in value as interest rates rise, which aligns with the manager's objective. Option A, a long position in a callable corporate bond, is incorrect because, despite the call feature reducing the bond's duration, the overall duration remains positive. Option B, a long position in a putable corporate bond, is also incorrect for similar reasons as the callable bond; the duration remains positive, albeit lower than an option-free bond. Option D, an interest rate swap paying LIBOR plus a spread and receiving fixed, is incorrect because this type of swap would decrease in value as interest rates rise, which is the opposite of what the manager is seeking. The explanation is based on the principles of duration and how different types of fixed-income securities and interest rate swaps react to changes in interest rates. This understanding is crucial for managing interest rate risk and adjusting a portfolio's exposure accordingly.

Author: LeetQuiz Editorial Team