A firm with fixed-rate debt that expects interest rates to fall may engage in a swap agreement to:
A) pay fixed-rate interest and receive floating rate interest.
B) pay floating rate and receive fixed rate.
C) pay fixed rate and receive fixed rate.
D) pay floating rate and receive floating rate.

Question

Quizplus · Accepted Answer

If a firm expects interest rates to fall, they would want to pay floating rate (which will decrease) and receive fixed rate (which would be higher than the future floating rate). This would protect them from the decrease in interest rates and allow them to save money on their interest payments. Therefore, the best choice in this situation is to pay floating rate and receive fixed rate, which is option B.

A Firm with Fixed-Rate Debt That Expects Interest Rates to Fall