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ABC Co. has just issued AED 1 million in five-year bonds with a variable annual interest rate defined as the Emirates Interbank Offered Rate (EIBOR)

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ABC Co. has just issued AED 1 million in five-year bonds with a variable annual interest rate defined as the Emirates Interbank Offered Rate (EIBOR) plus 1.3% (or 130 basis points). EIBOR is at 1.7%, low for its historical range, so ABC management is anxious about an interest rate rise. They find another company, XYZ Inc, (Swap Bank), that is willing to pay ABC an annual rate of EIBOR plus 1.3% on a notional principal of AED 1million for 5 years. In other words, XYZ will fund ABC's interest payments on its latest bond issue. In exchange, ABC pays XYZ a fixed annual rate of 6% on a notional value of AED1 million for five years. ABC benefits from the swap if rates rise significantly over the next five years. XYZ benefits if rates fall, stay flat or rise only gradually

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