Final answer:
An Interest rate swap is a contract for exchanging fixed-rate debt obligations for floating-rate debt obligations. Floating exchange rates allow the forex market to determine currency values, leading to potential volatility. Interest rates significantly affect the value of bonds in this context.
Step-by-step explanation:
A contract to exchange debt obligations at a fixed rate for debt obligations at a floating rate is commonly known as an interest rate swap. These financial instruments are used by companies that want to manage their interest rate exposure, either because they have a loan on which they want to pay a fixed rate instead of a variable rate, or vice versa.
In the context of exchange rate regimes, a policy allowing the foreign exchange market to set exchange rates is termed a floating exchange rate. This is in contrast to a fixed exchange rate, where the government targets a specific value against another currency or a basket of currencies. The U.S. dollar, for instance, operates under a floating exchange rate system. A major concern with floating exchange rates is that they can lead to more volatile shifts in currency values, influenced by market dynamics, economic indicators, and investor sentiments.
Bonds are debt securities that can be impacted by these exchange rates, especially when the companies that issue bonds or the investors who buy them are engaged in international operations. Their value is also highly influenced by prevailing interest rates, which determine the attractiveness of bonds to investors.