An interest rate swap involves:

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Question: An interest rate swap involves:

Option a: Exchanging principal amounts between two parties. While swaps may reference notional principals, the critical feature is the exchange of interest payments, not the actual principal itself. Therefore this statement is misleading because it emphasizes principal exchange, which does not occur in a standard interest rate swap.

Option b: Exchanging ownership of debt securities. An interest rate swap does not involve transferring ownership of debt instruments or bonds between parties. It is a contractual agreement to exchange interest cash flows, not to swap the underlying securities themselves.

Option c: Exchanging currencies and interest payments. This describes a cross-currency basis swap or a currency swap, which combines both interest rate and currency exchange. A plain vanilla interest rate swap typically involves only interest payments in the same currency, not currency exchange.

Option d: Exchanging revenues and interest payments on debt. This phrasing is unclear and inaccurate for a standard interest rate swap, which focuses on the exchange of fixed vs. floating interest payments, not revenues in general.

Option e: Exchanging fixed-rate and floating-rate interest payments between two parties. This captures the essence of a typical interest rate swap: one party pays a fixed rate on the notional amount, while the other pays a floating rate that resets (often tied to a reference rate like LIBOR or SOFR). The net cash flows are settled, notional is largely not exchanged, and the terms reflect differing interest-rate expectations between the counterparties.

In summary, the only option that correctly describes a standard interest rate swap is the one stating that fixed-rate and floating-rate interest payments are exchanged between two parties. The other options either misstate the mechanics (principal exchange), the scope (ownership of securities, currency exchange), or introduce terms not characteristic of a vanilla interest rate swap.

FINS5512-Financial Markets & Institutions - T3 2025

An interest rate swap involves:

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GHI Industries has issued $180 million worth of long-term bonds at a fixed rate of 14%. GHI Industries then enters into an interest rate swap where it will pay LIBOR and receive a fixed 6% on a notional principal of $180 million. After all these transactions are considered, GHI's cost of funds is:

The interest rate swap strategy of a firm with fixed rate debt and that expects rates to go up is to:

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Part 1Interest rate swaps have an advantage over options and futures in that:Part 2 A. There is a large market for them. B. They can be written for a long time horizon. C. They are more liquid. D. They can limit interest rate risk.

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FINS5512-Financial Markets & Institutions - T3 2025

An interest rate swap involves:

View Explanation

Log in for full answers

Similar Questions

GHI Industries has issued $180 million worth of long-term bonds at a fixed rate of 14%. GHI Industries then enters into an interest rate swap where it will pay LIBOR and receive a fixed 6% on a notional principal of $180 million. After all these transactions are considered, GHI's cost of funds is:

The interest rate swap strategy of a firm with fixed rate debt and that expects rates to go up is to:

An agreement to swap a fixed interest payment for a floating interest payment would be considered a/an:

Part 1Interest rate swaps have an advantage over options and futures in​ that:Part 2 A. There is a large market for them. B. They can be written for a long time horizon. C. They are more liquid. D. They can limit interest rate risk.

AIG Co. expects interest rates to rise over the next 12 months. To hedge its floating-rate loan, the company should:

Lockheed wants 5-year floating rate debt in USD. 5-year IRS = 4%. SOFR = 4.15%. It could issue 5-year fixed rate at 4.5% or 5-year FRNs at SOFR + 1%. What should it do?

A swap that technically is a succession of forward contracts on interest rates is

More Practical Tools for Students Powered by AI Study Helper

Making Your Study Simpler

Part 1Interest rate swaps have an advantage over options and futures in that:Part 2 A. There is a large market for them. B. They can be written for a long time horizon. C. They are more liquid. D. They can limit interest rate risk.