Preliminary and Incomplete Interest Rate Swaps and Corporate Default

摘要

Interest rate swaps are derivative contracts through which two counterparties exchange fixed and floating rate coupon payments. Such swaps were first used in the 1980s. By now they are among the most popular derivative contracts; see Figure 1. Several empirical and theoretical studies have examined why firms use swaps, and how firm characteristics affect the use of swaps. However, little is known about the impact of the use of interest rate swaps on corporate default rates, borrowing decisions, real production decisions and the pricing of corporate debt. In this paper, we develop a model of firms' production and financing decisions with .rms subject to productivity and interest rate risk. Our objective is to examine the impact of the use of interest rate swaps on the pricing of corporate debt by considering production and financing decisions, as well as default, in a consistent way.