An interbank-traded contract to buy or sell interest rate payments on a notional principal is called a/an:

Question

BlackTom AI · Accepted Answer

The question asks for the name of an interbank-traded contract that involves buying or selling interest rate payments on a notional principal.
Option A: "interest rate future." While interest rate futures do involve the trading of interest rate exposure, they are standardized contracts traded on exchanges and typically settle in cash based on the future level of an interest rate, rather than an ongoing set of periodic interest payments exchanged between two parties on a notional principal. This makes them distinct from the described instrument.
Option B: "interest rate swap." This instrument precisely matches the description: an over-the-counter (often interbank) contract where two parties agree to exchange a series of interest rate payments (for example, fixed vs. floating) calculated on a notional principal. The key elements are periodic payments and a notional amount on which those payments are based, with no exchange of principal at maturity.
Option C: "forward rate agreement." An FRA is a single-settlement, forward-style contract that determines the interest rate to be paid on a notional principal for a single period starting at some future date. It does not involve a series of ongoing interest payments exchanged over multiple periods, which is characteristic of an interest rate swap. That makes it a different product.
Option D: "none of the above." Given the conventional definitions, there is a standard instrument that fits the description above, so this option is not accurate.
Overall, the combination of periodic interest payments on a notional principal, typically exchanged between counterparties in an over-the-counter setting, aligns with an interest rate swap rather than futures or an FRA. The distinctions hinge on whether payments are single or periodic, exchange location (exchange-traded vs. over-the-counter), and whether the instrument involves a single settlement or multiple periods.

An interbank-traded contract to buy or sell interest rate payments on a notional principal is called a/an:

View Explanation

Log in for full answers

Similar Questions

A firm with variable-rate debt that expects interest rates to rise may engage in a swap agreement to:

Assume that a firm has a floating rate debt and a low credit rate. How can it use a swap rate agreement with a counterparty to achieve a fixed rate payment?

Why would a company that owns a floating rate asset enter into a vanilla swap as a fixed rate receiver?

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler