Interest rate swaps allow a firm to exchange fixed for floating-rate payments, but a swap cannot reduce actual net interest expenses.

Question

Quizplus · Accepted Answer

A well-structured interest rate swap can indeed reduce a company's net interest expenses by exchanging its fixed payments at a lower rate than its original borrowing rate. However, interest rate swaps are not a guaranteed way to reduce net interest expenses, as they may still result in unexpected cash flows or basis risk.

Interest Rate Swaps Allow a Firm to Exchange Fixed for Floating-Rate