24-46 Which of the following is the primary factor that determines the fixed and floating rates set at the time an interest rate swap is initiated?
A)Actual market rates that materialized over the life of the swap contract.
B)London interbank offer rate.
C)Upfront fee payments.
D)Market's expectations of future short-term rates.
E)Varying notional values underlying the swap.

Question

Quizplus · Accepted Answer

The primary factor that determines the fixed and floating rates set at the time an interest rate swap is initiated is the market's expectations of future short-term rates. This is because the swap allows parties to exchange fixed and floating rate payments based on their individual assessments of where short-term interest rates are headed. Therefore, the rates set at the beginning of the swap reflect the parties' expectations of future interest rate movements. The other answer choices are not the primary factor in determining the rates set at the beginning of the swap.

24-46 Which of the Following Is the Primary Factor That