Question

Certain features such as interest rates swaps can be included in corporate loans. Using relevant banking concept, discuss the motivation of corporate borrowers for requesting the inclusion of interest rates swaps. Give examples to illustrate your argument.                                                                                                                                                            

Answer 1

Interest rate swaps is an additional element to loan which is in form of a derivative contract which will provide the security holder with an additional advantage with having a flexibility of exchanging his stream of payments so interest rate swap will be helping the individuals in order to swap their future payment which are fixed in nature with future payments which are flexible in nature when we are considering the interest payments.

It will also help the security holders to swap their floating payments with the fixed payments so it will provide them with the double advantage of swapping their stream of payment.

Corporate borrowers are requesting for interest rate swaps because it will help them to exchange their stream of payments and have a higher level of flexibility upon their hands and eliminate the risk of interestare rate changing in the economy because when the risk of interest rate will be nullified then there will be lower level of uncertainty which will be associated with the payment of interest and hence it can be said that corporate borrowers will be having a better ability of repayment of their loans so they are always stressing for inclusion of interest rate swaps.

For an example if I hold variable rate loan, then my payment will be floating in nature and when the interest rates in the economy will be going up, if I have entered into a interest rate swap then I will be paying the floating and receiving the fixed, so I can easily manage with the change in the interest rate.