An interbank-traded contract to buy or sell interest rate payments on a notional principal is called a/an:
A) forward rate agreement.
B) interest rate future.
C) interest rate swap.
D) none of the above

Question

Quizplus · Accepted Answer

An interbank-traded contract to buy or sell interest rate payments on a notional principal is known as a forward rate agreement (FRA). In a FRA, the buyer and seller agree to exchange cash flows based on a predetermined notional principal amount, an interest rate, and a settlement date in the future. This agreement helps market participants to mitigate the risk of fluctuations in interest rates.  Interest rate futures and interest rate swaps are other derivative financial instruments that can help manage interest rate risk, but they differ from FRAs in their structure and mechanics.

An Interbank-Traded Contract to Buy or Sell Interest Rate Payments