A firm with variable-rate debt that expects interest rates to rise 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

By entering into a swap agreement to pay fixed-rate interest and receive floating-rate interest, a firm with variable-rate debt can hedge against the risk of rising interest rates. This swap effectively converts their variable-rate debt into fixed-rate debt, stabilizing their interest payments.

A Firm with Variable-Rate Debt That Expects Interest Rates to Rise