Derivatives Q23

23Microsoft issues 10-year fixed-rate bonds. Its treasurer expects interest rates to increase for all maturities for at least the next 2 years. He enters into a 2-year agreement with SCB to receive semi-annual floating-rates payments benchmarked on 6-month LIBOR and to make payments based on a fixed-rate. This agreement is best described as a:

Option : A
Explanation : A swap is an agreement between two parties to exchange a series of future cash flows. Microsoft receives floating interest rate payments and makes fixed interest rate payments. The given agreement is a swap.

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