Browning Enterprises currently has all fixed-rate debt. The firm would like to convert part of this to floating-rate debt. Which one of the following will accomplish this for the firm?
A) Option on floating-rate bonds
B) Forward contract on U.S. Treasury bills
C) Interest rate swap
D) Currency swap
E) Interest rate call option

Question

Quizplus · Accepted Answer

Interest rate swap is the only option listed that allows for the conversion of fixed-rate debt to floating-rate debt. The other options are not relevant to this objective. Option A involves purchasing a call option on floating-rate bonds, which is not the same as converting existing fixed-rate debt. Option B involves a forward contract on U.S. Treasury bills, which does not involve any debt conversion. Option D involves exchanging one currency for another, which is not relevant to changing the interest rate structure of the firm's debt. Option E involves purchasing a call option on interest rates, which is again not the same as converting existing fixed-rate debt.

Browning Enterprises Currently Has All Fixed-Rate Debt