Interest rate swaps involve the exchange of ________.

A) actual fixed-rate bonds for actual floating-rate bonds
B) actual floating-rate bonds for actual fixed-rate bonds
C) net interest payments and an actual principal swap
D) net interest payments based on notional principal, but no exchange of principal

Interest Rate Swaps

Financial derivatives contracts where two parties exchange interest rate payments on a specified principal amount, typically exchanging fixed for floating rates.

Fixed-rate Bonds

Fixed-rate Bonds are bonds that pay the same rate of interest from issue until maturity, regardless of changes in market interest rates.

Floating-rate Bonds

Bonds whose interest rate payments adjust periodically based on an underlying benchmark, making them less sensitive to interest rate changes.