Bank One Corporation - Page 190

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                         b.  End Users’ Uses of Interest Rate Swaps                   
                              i.  Combat Interest Rate Changes                        
               End users commonly use interest rate swaps to hedge                    
          (minimize) their risk of adverse changes in interest rates.                 
          Interest rate risk is the potential fluctuation in the value of a           
          financial instrument due to a change in the level of interest               
          rates.  Whereas the market values of fixed-rate loans are exposed           
          to significant interest rate risk, the market values of                     
          floating-rate loans are not.  A fall (or rise) in interest rates            
          causes the market value of a fixed-rate loan to increase (or                
          decrease).  The fall (or rise) in interest rates leaves the                 
          market value of a floating-rate loan unchanged; the interest                
          payments on the floating-rate loan fall (or rise) together with             
          interest rates.                                                             
               Managing interest rate risk is an important function of                
          financial managers in entities such as corporations and financial           
          institutions, and an interest rate swap is a tool with which                
          financial managers may readily change their exposure to interest            
          rate fluctuations.  Through a swap, an institution may change the           
          nature of its liabilities from fixed-rate liabilities to                    
          floating-rate liabilities, or vice versa.  A company liable on              
          debt paying a floating interest rate, for example, may guard                
          against a rise in interest rates by entering into a swap under              
          which it pays a fixed rate of interest and receives a floating              






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Last modified: May 25, 2011