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Q32.

Expert-verified
Intermediate Accounting (Kieso)
Found in: Page 610

Short Answer

Why might a company become involved in an interest rate swap contract to receive fixed interest payments and pay variable?

A company might enter into the contract of the interest rate swap contract to set off the fixed payment of the debt obligation against the fixed payment swap.

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Step by Step Solution

Definition of interest rate swap contract

An interest rate swap contract means the exchange of interest rates between two parties.

The reason a company chooses an interest rate swap contract

Whenever a company enters into an interest rate swap, the company wants to hedge the fair value of a certain fixed debt obligation. From this, the company wants to set off its fixed debt obligation with the payment received from the contract. This leads to a fall in the interest rate that increases the value of the swap contract. The swap contract is a very important part of risk management. It is directly related to the interest rate and affects the fixed debt obligation. Hence, the main reason for receiving the fixed interest payment is to set off against fixed debt obligations.

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