A corporation issues five-year fixed-rate bonds. Its treasurer expects interest rates to decline for allmaturities for at least the next year. She enters into a one-year agreement with a bank to receive quarterly fixed-rate payments and to make payments based on floating rates benchmarked on threemonth LIBOR. This agreement is best described as a:
A swap is a series of forward payments. Specifically, a swap is an agreement between two parties to exchange a series of future cash flows. The corporation receives fixed interest rate payments and makes variable interest rate payments. Given that the contract is for one year and the floating rate is based on three-month LIBOR, at least four payments will be made during the year.