If a company that had a fixed-rate liability wanted to achieve a floating-rate cost of funds through a swap,it would pay a:
A) fixed rate to the counterparty and receive a floating rate in return from the counterparty.
B) floating rate to the counterparty and pay a floating rate to the fixed-rate lender.
C) floating rate to the counterparty and pay a fixed rate to the fixed-rate lender.
D) floating rate to the counterparty and receive a fixed rate in return from the counterparty.

Question

Quizplus · Accepted Answer

To achieve a floating-rate cost of funds through a swap, the company would pay a floating rate to the counterparty and receive a fixed rate from the fixed-rate lender. This would help the company to convert its fixed-rate liability into a floating-rate liability, and thus, achieve a lower cost of funds over time. Option C is the only choice that includes paying a fixed rate to the fixed-rate lender.

If a Company That Had a Fixed-Rate Liability Wanted to Achieve