Question

Which of the following describes an interest rate swap?

A. The exchange of a fixed rate bond for a floating rate bond.
B. A portfolio of forward rate agreements.
C. An agreement to exchange interest at a fixed rate for interest at a floating rate.
D. All of the above.

Answer 1

An interest rate swap is a financial instrument used to exchange interest rate payments between parties to reduce exposure to interest rate fluctuations or to secure a lower interest rate. A rise in the supply of money often leads to a decrease in interest rates.

Step-by-step explanation:

An interest rate swap is a financial derivative that companies use to exchange interest rate payments with each other. Swaps typically involve the exchange of a fixed interest rate for a floating rate, or vice versa, to reduce or increase exposure to fluctuations in interest rates or to obtain a marginally lower interest rate than would have been possible without the swap.

Changes in the financial market can affect interest rates. For instance, a rise in the supply of money can lead to a decline in interest rates, as there is more capital available than the demand. Conversely, a rise in demand for money and credit could increase rates because the available supply of capital does not meet the demand. These dynamics are influenced by various factors such as the stock market, the supply and demand of a currency, domestic interest rates, and the gold standard.