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    Question

    The concept of interest rate swaps involves

    counterparties who want to:
    A Exchange a floating rate commitment for a fixed rate loan Correct Answer Incorrect Answer
    B Exchange debt for stock Correct Answer Incorrect Answer
    C Exchange a short-term loan for a long-term loan Correct Answer Incorrect Answer
    D A and B Correct Answer Incorrect Answer
    E All of the above Correct Answer Incorrect Answer

    Solution

    An interest rate swap is a type of financial derivative contract in which two parties agree to exchange interest rate cash flows over a specified period. • Typically, one party pays a fixed interest rate, while the other pays a floating interest rate, based on a notional principal. • It allows companies to manage interest rate risk, such as protecting against rising floating rates or reducing financing costs. • Importantly, interest rate swaps do not involve exchanging debt for stock or altering loan maturities. Those are separate financial arrangements. Thus, the primary purpose of an interest rate swap is to exchange fixed and floating rate commitments within the same currency.

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