Final answer:
In an interest rate swap, the fixed rate payer does not profit if interest rates rise as they continue to pay the agreed fixed rate. The party paying the floating interest rate receives higher interest payments if interest rates rise, resulting in a loss for the fixed rate payer.
Step-by-step explanation:
In an interest rate swap, the fixed rate payer does not profit if interest rates rise. In fact, the fixed rate payer can face losses if interest rates increase.
In an interest rate swap, two parties agree to exchange interest rate payments based on a notional principal amount. One party pays a fixed interest rate, while the other party pays a floating interest rate based on an underlying benchmark, such as the LIBOR rate. The purpose of an interest rate swap is to manage or hedge interest rate risk.
If interest rates rise in an interest rate swap, the party paying the fixed interest rate will continue to pay the agreed fixed rate. However, the floating rate payer will receive higher interest payments, resulting in a loss for the fixed rate payer.