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) ___________.

Question

Quizplus · Accepted Answer

An interest rate swap would allow both firms to achieve their preferences - the first firm could exchange its fixed-rate payments for floating-rate payments with the second firm, while the second firm could exchange its floating-rate payments for fixed-rate payments with the first firm. This would allow both firms to align their payment obligations with their preferred interest rate structure. The other options (currency swap, commodity swap, interest rate forward contract, interest rate option contract) do not address the issue at hand of mismatched payment obligations and interest rate preferences.

Your ﬁRm Is Required by Its Bond Indenture to Make