Question

Which is not a use of interest rate swaps?

A. To convert a fixed rate obligation to a floating rate obligation

B. To convert a floating rate income to a fixed rate income

C. To speculate on the future change of interest rate

D. To hedge the risks of early payments from a callable debt obligation

Answer 1

The interest rate swaps are used for ,

• Converting a fixed rate obligation into a floating rate obligation. If the swap owner believes that, he might get a higher cash flow if he receives the floating payments rather than fixed one, then he might exchange his fixed obligations for floating.
• To convert a floating rate obligation into a fixed rate. If the payer in a swap option, believes that the payments obligation might be reduced if he follows a floating rate, then he might exchange the fixed payments for floating ones.
• Interest rate swaps are also useful to increase/ reduce exposure to interest rate fluctuations and speculate or hedge the future change of interest rates. If i believe that the interest rate are going to fall in the future, then i might enter into a pay floating and receive fixed swap.

Interest rate swaps are not useful for hedging the risks of early payments from a callable debt obligation.  So, option 4 is the correct option.