24-34 An interest rate swap
A)involves a swap buyer who agrees to make a number of variable-rate payments on periodic settlement dates.
B)involves a swap seller who agrees to make a number of fixed-rate payments on periodic settlement dates.
C)is effectively a succession of forward contracts on interest rates.
D)involves comparative advantage by the fixed-rate side of the swap,but not the variable-rate side.
E)eliminates credit risk.

Question

Quizplus · Accepted Answer

An interest rate swap is effectively a succession of forward contracts on interest rates. It involves two parties that agree to exchange one stream of future interest payments for another, based on a specified notional amount. One party pays a fixed rate, and the other pays a floating rate based on a specified reference rate. The swap can be used to hedge interest rate risk or to take advantage of comparative advantage in borrowing costs. However, it does not eliminate credit risk.

24-34 an Interest Rate Swap