The instrument that involves a contract between two parties to exchange interest payments on a specified principal amount (referred to as the notional principal) for a specific period is called:

Question

Options

• Atransfer rate
• Binterest rate swap
• Cinterest relocation
• Dpassing on interest rate

• A
  15% (6)
• B
  77% (30)
• C
  3% (1)
• D
  5% (2)

Explanation

Option B is correct because an interest rate swap is precisely defined as a contractual agreement between two parties to exchange interest payments - typically one fixed-rate stream for one floating-rate stream - on a notional principal amount over a set period. The notional principal itself never changes hands; only the interest payments are swapped.

Options A, C, and D are fabricated terms with no standing in finance. "Transfer rate," "interest relocation," and "passing on interest rate" describe no recognized financial instrument or contract type - they are designed to sound plausible but lack any formal definition.

Memory tip: Think of the word swap literally - two parties swap (exchange) their interest obligations. The word "swap" in the answer directly mirrors what the instrument does, making it self-describing once you know the mechanics.

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