Differences in credit quality spreads between floating and fixed rate markets create the opportunity for both parties in an interest rate swap to lower their cost of funds.

Question

Quizplus · Accepted Answer

In an interest rate swap, differences in credit quality spreads between floating and fixed rate markets can indeed create opportunities for both parties to lower their cost of funds. This is because each party may have a comparative advantage in borrowing in one market over the other, allowing them to swap interest payments and effectively reduce their borrowing costs.

Differences in Credit Quality Spreads Between Floating and Fixed Rate