P 13-3 Cash-flow hedges, interest rate swap On January 1, 2016, Cam borrows $400,000 from Ven. The five-year term note is a variable-rate one in which the 2016 interest rate is determined to be 8 percent, the LIBOR rate at January 1, 2016, +2%.

Subsequent years’ interest rates are determined in a similar manner, with the rate set for a particular year equal to the beginning-of-the-year LIBOR rate +2 percent. Interest payments are due on December 31 each year and are computed assuming annual compounding.

Also on January 1, 2016, Cam decides to enter into a pay-fixed, receive-variable interest rate swap arrangement with Gra. Cam will pay 8 percent.

Assume that the LIBOR rate on December 31, 2016, is 5 percent.

REQuIRED 1. Why is this considered a cash-flow hedge instead of a fair-value hedge?