Answer: C. Interest rate swap paying fixed and receiving LIBOR plus a spread

**Understanding Negative Duration Positions:** **Option C (Correct):** An interest rate swap where you pay fixed and receive floating (LIBOR + spread) has negative duration because: - When interest rates rise, the floating payments you receive increase in value - When interest rates fall, the floating payments you receive decrease in value - This creates an inverse relationship between the swap's value and interest rates **Why other options are incorrect:** **Option A:** Callable bonds have positive duration (though lower than option-free bonds) - their value decreases when rates rise. **Option B:** Putable bonds have positive duration (though lower than option-free bonds) - their value decreases when rates rise. **Option D:** An interest rate swap paying floating and receiving fixed has positive duration - its value decreases when rates rise. **Key Concept:** Negative duration instruments gain value when interest rates rise, providing a hedge against rising rate environments.

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