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 (LIBOR).
C)Upfront fee payments.
D)Market's expectations of future short-term rates.

Question

Quizplus · Accepted Answer

The market's expectations of future short-term rates are the primary factor that determines the fixed and floating rates set at the time an interest rate swap is initiated. This is because the swap is based on the difference between the fixed and floating rates, and this difference is affected by the anticipated movements of short-term rates in the future. The other options (A, B, and C) may also play a role in the pricing of the swap, but they are not as central as the market's expectations of future short-term rates.

Which of the Following Is the Primary Factor That Determines