Your firm is required by its bond indenture to make fixed-rate interest payments but prefers to make floating-rate payments. Another firm is obligated by its bond indenture to make floating-rate payments but desires to make fixed-rate payments. You can help both firms achieve their preferences by arranging a(n) ___________.
A) Currency swap.
B) Commodity swap.
C) Interest rate forward contract.
D) Interest rate option contract.
E) Interest rate swap.

Question

Quizplus · Accepted Answer

An interest rate swap is a financial derivative instrument that allows two parties to exchange interest rate payment obligations on their debt obligations. This is specifically designed to meet the needs of the firms described, where one wants to switch from fixed to floating rate payments and the other from floating to fixed.

Your Firm Is Required by Its Bond Indenture to Make