Which of the following instruments can the company use to convert its fixed rate liability to a floating rate liability?

A company has a long term loan from a bank at a fixed rate of interest. It expects interest rates to go down.

Which of the following instruments can the company use to convert its fixed rate liability to a floating rate liability?
A . A fixed for floating interest rate swap
B . A currency swap
C . A forward rate agreement
D . Interest rate futures

View Answer

Answer: A

Explanation:

A fixed for floating interest rate swap would be the most appropriate to the company’s

needs. It will allow it to receive a fixed rate (which will offset the fixed payment it has to

make on the loan) and pay a floating rate which it expects will be lower than the fixed rates.

Choice ‘a’ is the correct answer.