Reason, for Company S using the swap agreement and to go ahead and issue floating rate bonds because the net effect of issuing fixed rate bonds and then doing a swap is to create a variable rate bond. Interest Rate Swap: Swapping the interest rate helps the companies by allowing them to exchange their interest payments at the decided amount for a mutually agreed period of time. It is done to hedge towards adverse interest rate movements and to get a balance between fixed and variable debt.

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Chapter 25, Problem 14CQ

Summary Introduction

To explain: Reason, for Company S using the swap agreement and to go ahead and issue floating rate bonds because the net effect of issuing fixed rate bonds and then doing a swap is to create a variable rate bond.

Interest Rate Swap:

Swapping the interest rate helps the companies by allowing them to exchange their interest payments at the decided amount for a mutually agreed period of time. It is done to hedge towards adverse interest rate movements and to get a balance between fixed and variable debt.

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