Question

Which one of the following statements is FALSE regarding interest rate swaps?

a.	Two parties may enter into an interest swap agreement to increase their borrowing costs
	b.	Two parties with preexisting debt may enter into an interest swap agreement because their financial needs may have changed due to the economic conditions
	c.	They are agreements between two parties to swap series of fixed interest rate cash flows for series of floating interest rate cash flows
	d.	They are structured as debt
	e.	Two parties with preexisting debt may enter into an interest swap agreement because their expectations of interest rates may have changed due to the economic conditions

Answer 1

Option E is correct. Two parties with preexisting debt may enter into an interest swap agreement because their expectations of interest rates may have changed due to the economic conditions.

Interest Rate Swaps are the financial Derivates which are used to minimise the risk of increase in interest. When a party has fixed interest rate it expects the inrterest to fall, another party which pays floating interest and expects the interest rate to increase. When these two parties meet they swap the existing interest Rate for their desired Rates.

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