An agreement where two firms exchange their interest payment obligations for a period of time (i.e.fixed for floating)is known as what?
A)An interest rate swap
B)A forward rate agreement
C)An interest rate put option
D)A financial futures contract

Question

Quizplus · Accepted Answer

An interest rate swap is an agreement between two firms to exchange their interest payment obligations for a certain period of time. This allows one firm to convert its fixed-rate payments into floating-rate payments, while the other firm can convert its floating-rate payments into fixed-rate payments. The parties involved in the swap agreement negotiate the terms of the swap, including the notional amount, the fixed and floating interest rates, and the payment dates. This helps them to manage their exposure to interest rate fluctuations and to reduce their interest rate risk. Choices B), C), and D) do not accurately describe an interest rate swap.

An Agreement Where Two Firms Exchange Their Interest Payment Obligations