Assume two borrowers,A and B,enter into an interest rate swap agreement and the settlement date is one year after the date of initiation.B exchanges his fixed interest rate with A for a floating rate.The fixed and the floating rate as of the initiation of the agreement is 9%.Which one of the following is true if the interest rate increases to 9.5% at the time of settlement?

Question

Quizplus · Accepted Answer

In an interest rate swap agreement, one party exchanges a fixed interest rate with another party who exchanges a floating interest rate. In this case, A is receiving the fixed rate and B is receiving the floating rate.

If the interest rate increases to 9.5%, it means that the floating rate has increased. This means that B will have to pay more to A on the settlement date to compensate for the higher interest rate on the floating rate. Therefore, choice B is the correct answer. A will not have to pay money to B, and neither A nor B will have to pay on the settlement date is not correct as one party will have to pay to compensate for the increase in the interest rate.

Assume Two Borrowers,A and B,enter into an Interest Rate Swap