April 10, 2009
How a Debt Swap Becomes a Liability
Colleges have been using swap contracts to reduce their borrowing costs and keep their debt costs predictable. But changes in the bond market and in interest rates have made many of those swap contracts far more volatile and costly than institutions expected.
Here's how: Borrower University issues debt, agreeing to pay bondholders a floating rate of interest. The rate is lower than what the university would have paid had it issued fixed-rate debt for 30 years. But Borrower U. is also
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