Interest rate swaps are agreements between two parties to exchange a fixed for a variable interest rate payment over a future period.

a. The fixed rate payer in a swap typically pays the U.S. Treasury bond rate plus a risk premium.

b. The flexible-rate payer in a swap normally pays the London Interbank Offered Rate (LIBOR).

c. Interest rate swaps are useful when a government, firm, or investment company can borrow more cheaply at one maturity but would prefer to borrow at a different maturity.

d. Swaps can be based on an agreed-upon exchange of any two future sequences of payments.