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CFA Level I · CFA Level I Exam · Derivative Benefits, Risks, and Issuer and Investor Uses

A corporation has floating-rate bank debt and expects interest rates to rise. It wants predictable interest costs without refinancing the loan. The most appropriate action is to enter an interest rate swap in which it:

The company should pay fixed and receive floating. The floating payments received from the swap offset the floating interest owed on the loan, leaving an effectively fixed cost and protecting against rising rates without changing the underlying debt.

  1. Apays floating and receives fixed
  2. Bpays fixed and receives floatingCorrect
  3. Cpays fixed and receives fixed

Explanation

Paying fixed and receiving floating means the floating receipts offset the floating loan payments, leaving a net fixed cost. Pay floating/receive fixed would double the floating exposure. Paying and receiving fixed does not offset the floating debt.

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