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Neutralize Volatility

Finding the right mix of floating and long-term interest rates to fund growth or retire debt can neutralize interest rate volatility.

One option is an interest rate swap. A swap works as follows for a hypothetical business with a variable rate loan based on the London Inter-Bank Offered Rate (LIBOR) plus 2 percent with a bank.

In the first leg of the swap, the bank sends a payment to the client to cover the monthly cost of the client's short-term variable rate loan, valued at LIBOR plus two 2 percent.

In the second leg, the client makes that payment to the bank's loan servicing department. This process effectively cancels the net exposure of the original loan.

A person using pliers to cut and strip a wire.

In the third leg, the bank determines the market rate for a longer-term interest rate swap, such as a 4 percent fixed rate at 10 years. The client then pays that monthly swap cost to lock in the lower rate.

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