Local governments often have variable rate debt and hedge the related interest rate risk with an interest rate swap. These governments incur gains on these swaps when:

Question

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DGovernments using receive variable/pay fixed interest rate swaps gain when interest rates rise because they pay a fixed rate while receiving a variable rate that increases. Conversely, with receive fixed/pay variable swaps, they gain when interest rates fall, as they pay less on the variable side while receiving a fixed rate.

Local Governments Often Have Variable Rate Debt and Hedge the Related