The cash flows that actually are paid on an interest rate swap depend on
A)the market's expectations of future short-term interest rates.
B)upfront fee payments.
C)varying notional values underlying the swap.
D)special interest rate terms and indexes.
E)actual market rates that materialize over the life of the swap contract.

Question

Quizplus · Accepted Answer

The cash flows that are actually paid on an interest rate swap depend on the actual market rates that are realized over the life of the swap contract. This is because an interest rate swap involves exchanging cash flows based on a fixed rate and a variable rate (such as LIBOR) that fluctuates over time. The fixed rate is predetermined at the initiation of the swap contract, while the variable rate is based on market conditions and will change over time based on various factors such as economic growth, inflation, supply and demand for credit, and monetary policy. Therefore, the actual cash flows paid on an interest rate swap will depend on the variable rate that is realized over the life of the contract, which is influenced by market conditions.

The Cash Flows That Actually Are Paid on an Interest