Final answer:
Interest rate swaps are popular for their ability to manage interest rate risk, hedge against fluctuations, and align income streams with interest obligations, contributing to financial predictability.
Step-by-step explanation:
Interest rate swaps are popular because they allow financial parties to manage their exposure to interest rate fluctuations, hedge against risk, and potentially gain financial advantages.
By swapping a fixed interest rate for a variable one, or vice versa, corporations, financial institutions, and other entities can align their income streams with their interest obligations, thereby achieving more predictable future financial results.
The popularity of interest rate swaps surged as they were seen as a tool to mitigate the uncertainties associated with variable interest rates, especially in a market where entities have differing predictions about the direction of interest rates.
The 2008 financial crisis highlighted examples where the misuse and complexity of various financial instruments, including collateralized debt obligations (CDOs) and credit default swaps, led to significant financial turmoil.