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Alternative Explanations of Interest Rate

Swaps: A Theoretical and Empirical
Analysis
ARTICLE in FINANCIAL MANAGEMENT JANUARY 1989
Impact Factor: 1.36 DOI: 10.2307/3665893

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Alternative Explanations of Interest Rate

Swaps: A Theoretical and Empirical
Analysis
Larry D. Wall and John J. Pringle

Larry D. Wall is an Assistant Vice President at the Federal Reserve Bank

of Atlanta, GA. John J. Pringle is a Professor of Finance at the University
of North CaroUna at Chapel Hill

An interest rate swap is a transaction in which two

parties contract to swap interest payments for a predetermined period of time. The credit risk of a swap
is less than that of a comparable debt contract because
no principal changes hands and the payments under the
swap are typically made on a net basis.^ Interest rate
swaps first appeared in 1981, and since then the market

has grown rapidly. One measure of the size of the

market is the "notional principal" of the swap, that is
the dollar amount on which the interest calculations
are based. A survey of 49 leading participants in the
swap market found that the outstanding notional principal of their swaps totaled $889.5 billion in 1987.3 The
rapid growth of the market makes clear that interest

The opinions expressed in this paper are those of the authors and do
not necessarily represent the views of the Federal Reserve Bank of
Atlanta or the Federal Reserve System. The authors are grateful to
Eugene Comiskey, Deborah Turner, three anonymous reviewers, and
the editor for helpful suggestions; to Kevin Johnson for data analysis;
and to Hal Clark for conducting the NAARS search.

terms "interest rate swaps" and "swaps" will be used as synonyms in this paper. Swaps involving more than one currency, called
currency swaps, are not considered here. Early in the development of
interest rate swaps, the transaction typically took place between two
parties, often a domestic non-financial firm and a foreign bank,
usually with a swap dealer acting as agent and/or guarantor. Dealers,
typically commercial banks and investment banks, "matched" the
swapping parties, pairing up parties wishing to swap floating for fixed
with those wishing the opposite. As the market has developed, "matching" has become less common. Many dealers now act as principal,
taking either side of the swap.

'See Smith, Smithson, and Wakeman [16] for a review of swap mechanics and Smithson [18] for a discussion of the relationship of interest
rate swaps to forward, future, and options contracts. Wall and Pringle
[24] provide a review of economic and policy issues related to swaps.
59

60

rate swaps have become an important financing tool in

a very short period of time.
The practical effect of interest rate swaps is to alter
the repricing interval of a firm's debt."* Interest rate
swaps can be used by corporations to adjust the repricing interval of already-outstanding debt, providing a
low-cost way to adapt to interest rate changes. Swaps
also are used as part of an integrated plan for new debt
issuance, using short-term debt plus a swap in lieu of
long-term debt. This latter use raises an interesting
question: why would a firm issue debt with an undesirable repricing interval and then use a swap to
obtain the preferred interval? If there are advantages
from such a transaction, they must lie in lower overall
financing costs.^
A motive for swaps offered by Bicksler and Chen [3]
and by many market participants is that swaps allow
firms to arbitrage the quality spread differential (QSD),
the difference in quality spreads at short and long
maturities (see Appendix A for a discussion of quality
spread differentials). Some proponents of swaps claim
that QSDs arise because some firms have a comparative advantage in short-termfinancialmarkets and other
firms have an advantage in long-term markets. Arbitrage, according to this argument, allows both participants in a swap to obtain lower financing costs than
would be possible if each obtained financing independently. This explanation appears to be supported
by the observation that both counterparties to a swap
frequently do achieve lower initial interest rates than
either could achieve independently.
A recent paper by Turnbull [20] in this journal
argued that QSDs are not arbitragable. He shows that
interest rate swaps are a zero-sum game in the absence

^See Jackson [10] for a recent discussion of the size of the swaps
market. The aggregate figure for notional principal cited above likely
contains some double counting.
''One could refer to this process as adjusting maturity structure, but
more precisely it is the repricing interval that is being altered. In fact,
swaps do not change any of the terms of the outstanding debt. Instead,
swaps may change the frequency with which the price of debt adjusts
to changes in market interest rates, for example, by changing debt
whose price depends on the quarterly LIBOR rate to debt which will
not respond to changes in market interest rates for 5 years.
'Swaps have a small direct negative effect due to the costs of arranging them. However, such costs appear to be small. Whittaker [25,
p.34] suggests that the bid/offer spread for swaps maturing in five
years or less as of May 1987 was no more than 12 basis points. This
spread must cover not only transaction costs and the swap dealer's
profit, but also expected credit losses to the dealer.

FINANCIAL MANAGEMENT/SUMMER 1989

of market imperfections and swap externalities. Turnbull's analysis suggests that quality spread differentials
exist because of factors that are not exploitable for
economic gain. However, the QSD argument is still
being asserted in spite of the analysis of Turnbull (for
example, see Felgran [9]).
Whether or not swaps are a zero-sum game is an
important question. If they are, then some benefits
attributed to swaps are illusory and some parties to
swaps may be bearing risk for which they are not being
compensated. If, on the other hand, swaps do provide
economic benefits, a better understanding of their rationale will improve their usefulness.
The principal problem in analyzing competing theories of swap explanations and motives is the lack of data
on swap market participants. There is no central market-place for trading swaps and there is no regulatory
body that requires disclosure of individual swap market
transactions. Individual dealers have substantial information on their customers but these data have substantial proprietary value to the dealers. Probably the only
systematic disclosure requirement for interest rate swaps
is the accounting requirement that firms disclose "material" transactions. (A problem with relying on annual
reports to identify swap users is that not all firms may
regard their swap transactions as material for financial
disclosure purposes.) Qne study, by Comiskey, Mulford, and Turner [8], exploits this data source, but their
focus is on the disclosure policies of the 100 largest
commercial banks.

I. Arbitrage of the Quality Spread

Differentiai
The quality spread represents the premium that a
lower quality credit must pay over a higher rated credit
for funds ofthe same denomination and maturity. Quality
spreads between different rating classes are generally
observed to increase with maturity. This increase appears as a quality spread differential, the difference
between the quality spread at two different maturities,
long and short.
For example, a BBB credit might pay 50 basis points
more than a AAA credit for short-term funds, but 120
basis points more for long-term funds. In this case, the
QSD is 70 basis points. Appendix A discusses the QSD
in more detail and provides an example of how an
interest rate swap can be used to (apparently) exploit
the QSD to the benefit of both parties. The combined
financing costs of the two parties are reduced by an
amount equal to the QSD. Although the arbitrage

WALL AND PRINGLE/EXPLANATIONS OF INTEREST RATE SWAPS

explanation of swaps appears plausible at first glance,

whether the gains are real or illusory depends on why
the OSD exists in the first plaee.
A. Explanations ofthe QSD Based on Bankruptcy

One possible explanation of the quality spread differential depends on bankruptcy. Early models of bond
risk premiums suggested that risk premiums may be
independent of term to maturity. Bierman and Hass [4]
demonstrate independence under the assumption that
the firm's survival probabihty is stationary and independent of other time periods, that payments to bondholders are all or nothing, and that the term structure
of default risk-free rates is flat.^ If these conditions
held, there would be no quality spread differential.
Jonkhart [11] develops a more general model in
which risk premiums are not constant over time. Assuming risk-neutral investors, Jonkhart shows that the
default premium on debt will vary with maturity if (i)
the probability of firm survival is not constant through
time, (ii) the expected value of the failure recovery
fraction (the percentage of promised payment that is
actually paid when the firm fails) is not constant over
time, or if (iii) the term structure of risk-free rates of
interest is not flat.^
Jonkhart's analysis may explain the existence of QSDs.
To illustrate, suppose that a BAA firm's probability of
bankruptcy at some point during the next ten years is
twenty times that of its probability for next year, while
a AAA firm's probability of bankruptcy over the next
ten years is only eleven times (or any number greater
than ten and less than twenty) its probability of failing
next year. Both the BAA and the AAA firm will pay a
greater risk premium on ten-year bonds than on oneyear notes. However, the BAA will have to pay a proportionately greater risk premium because its risk of
bankruptcy increases at a faster rate.
QSDs are not exploitable to the extent that Jonkhart's model explains observed differentials. For example, suppose a BAA firm uses the combination of
short-term debt and an interest-rate swap as a substitute for long-term debt. Initially the firm will have
lower interest expense than would be the case if it had
financed with long-term debt (see the analysis in Appendix A). However, as the firm's probability of bank^Yawitz [26] shows that the independence assumption holds when
bondholders receive a fixed proportion of their promised payment
under certain circumstances.
^Chiang and Kolb [7] show that the expected payoff in each period is
a function of time even if the firm's cash flow is independent of time.

61

ruptcy increases, so will its cost of short-term debt.^

The expected value of interest payments if the firm
issues a short-term note and then swaps will equal the
expected value if the firm issues long-term debt. The
AAA firm may appear to have an interest savings in this
example, but in fact its reduced expense is merely compensation for the risk that the BAA will not perform
its part of the swap agreement.^
B. Risk Shift to Shareholders

The previous section shows that quality spread differential may exist in a risk-neutral model. An explanation for the quality spread differential based on risk
aversion is provided by Loeys [12]. He suggests that the
difference in quality spreads between short and longterm maturities reflects the value ofthe option held by
short-term debtholders not to renew their debt if the
firm subsequently appears more risky than originally
anticipated. This option permits short-term creditors
to bear less risk than long-term creditors. If creditors
bear less of the risk when the firm issues short-term
debt rather than long-term debt, then the equity holders must bear more risk. Thus, the equity capitalization
rates of firms that use short-term debt should be higher
than those of firms relying on long-term debt, other
factors equal.
This argument provides a possible explanation for
the existence of a quality spread differential. The lower
quality spread at short debt maturities is offset by a
higher equity capitalization rate. To the extent that the
QSD is attributable to such risk shifting, the QSD is
not exploitable by interest rate swaps (or other means).
Via a swap, the low-rated firm appears to obtain a lower
fixed-rate by issuing short-term debt and then swapping. However, the apparent advantage of the lower
interest rate on debt is offset by a higher equity capitalization rate. Qn the other side, the apparent gain by
the higher-rated firm (a lower floating-rate) is simply
compensation for the credit risk it is taking with the
swap agreement, i.e., the risk that the other party may
not perform. In this case, the swap is a zero net present

^Note that the swap will not compensate the BAA firm for changes
in firm-specific risk premiums. Swap payments are based on a market
rate such as LIBOR, not on floating-rate payer's (the BAA firm in
this example) cost of funds.
'Both the AAA and the BAA firms may fail to perform under the
swap agreement. However, the probability that the BAA will not
perform is greater, therefore, the AAA firm receives compensation
from the BAA firm.

62

value transaction and the apparent ability of both parties to gain is illusory.
C. Other Contract Terms

Long-term debt contracts typically include restrictive covenants and options that are not contained in
short-term contracts. In order to evaluate the merits of
using swaps to change the repricing interval of funding,
these other contract provisions need to be considered.
For example. Smith, Smithson, and Wakeman [16]
suggest that quality spread differentials arise in part
because issuers of long-term securities are paying for
an optionthe option to prepay (or call) the securities
at some future date. The issuing firm pays for the call
option via a higher interest rate. If the option value of
the call provision is greater for lower-rated (higherrisk) firms, as seems plausible, the existence of the call
provision would give rise to a quality spread differential. In addition, the argument of Smith, et al. [16]
suggests that the QSD may appear larger than it actually is due to institutional differences between U.S. and
Eurodollar markets. Unlike domestic U.S. issues, Eurobond debt contracts often adjust call prices for changes
in market interest rates, thereby lowering the option
value of the call provision. Thus the quality spread at
the long end may be artifically inflated by comparing
rates paid on lower-rated debt issued in U.S. markets
against higher-rated Eurobond issues.
QSDs are not exploitable to the extent that they
arise from differences in the value of the prepayment
option. In an efficient market, the present value ofthe
lost option to prepay the debt on average should equal
the reduction in the present value of the interest payments. Any apparent gain to the higher-rated firm
would merely represent compensation for the risk of
non-performance by the lower-rated party.
D. Agency Costs

Wall [23] suggests still another explanation of quality

spread differentialsthat the differentials in part may
reflect differences in agency costs associated with longterm debt. Wall's analysis suggests that lower-rated
firms may find a combination of short-term debt and
interest rate swaps to have lower agency costs than
long-term, non-callable debt, even if no risk is shifted
to the firm's owners. In this model, higher-rated firms
agree to participate in swaps because the lower-rated
firms share part of their gains.
To explore this argument, consider a firm that finances projects in part with non-callable, long-term debt.
As shown in the literature on agency costs ([2, 5,14]),

FINANCIAL MANAGEMENT/SUMMER 1989

such financing creates incentives for the firm to underinvest and to shift investments from low-risk to high-risk
projects. The underinvestment incentive exists because
firms cannot retain for shareholders 100% ofthe benefits of future investment. Part of the benefit goes to
existing creditors via an increase in the value of their
debt claims due to the reduction in the probability of
bankruptcy. This division of the net present value of
gain of investing between shareholders and bondholders leads to an incentive to underinvest.
The higher the risk of pre-existing debt, the more
the impact of profitable investment on the market
value of that debt, the greater the fraction of net present value of new projects captured by debtholders, and
the stronger the adverse incentive to underinvest."^
Bondholders suffer from underinvestment because the
firm foregoes an opportunity to improve interest coverage and thereby to increase the value of the bondholders claim. Bondholders attempt to protect themselves
against underinvestment by adding a risk premium
proportional to the perceived risk of underinvestment.
The greater the risk of the firm, the greater the agency
cost component in the risk premium. Hence agency
costs due to underinvestment can give rise to a quality
spread differential.
With respect to risk shifting (the second agency
problem noted above), firms have an incentive to shift
toward higher-risk projects after issuing non-callable
bonds because bondholders bear a portion of the increase in downside risk, while shareholders receive all
ofthe upside potential. Hence, a zero net present value
transaction that shifts toward higher risk may actually
increase the value of the shareholders' claim, while
reducing commensurately that of the long-term creditor's claim.'^
The higher the risk of the firm, the more the bond
price is depressed by additional risk, and the more the
shareholders have to gain from the asymmetric effects
ofa risky project. Again, bondholders protect themselves by increasing the risk premium and by imposing
costly covenants and monitoring arrangements. The
higher the risk of the firm, the greater the need for
protection. Hence, as with the underinvestment prob-

'"AS Stulz and Johnson [ 19] point out, if the existing debt of the firm
is of low risk, there cannot be much of an underinvestment problem.
"while shareholders may have incentives to s shift toward high-risk
investment, managers may not have such incentive because of their
lack of diversification, thus introducing a second type of agency eost.
We sill not consider this issue here.

WALL AND PRtNGLE/EXPLANATIONS OF INTEREST RATE SWAPS

lem, agency costs increase with risk and contribute to

a quality spread differential.
Short-term debt financing reduces both types of
adverse incentives by allowing creditors to adjust the
risk premium in response to changes in investment
policy and other developments. By financing with shortterm debt, a firm avoids the agency costs of long-term
debt associated with these two types of adverse investment incentives. ^^ Short-term debt may reduce agency
costs in another way, in connection with insolvency.
Mayers and Smith [13] show that insolvent firms have
an incentive to underinvest in new assets. Creditors
may wish to take control of an insolvent firm as soon
after insolvency as possible to prevent underinvestment and also to prevent the diversion of existing assets
to higher risk ventures. However, creditors may not be
able to force the firm into reorganization until the firm
fails to make a promised debt service payment. Shortterm debt may accelerate the process, since an insolvent firm may have sufficient funds to pay interest on
long-term debt but not the interest and principal on
short-term debt. Thus, short-term debt may reduce
funding costs by strengthening the ability of creditors
to force reorganization, thereby reducing the premium
that long-term investors would impose in order to
offset the under-investment problem.
Wall [23] suggests that the combination of shortterm debt and interest rate swaps can reduce both
adverse incentive problems, and hence agency costs,
without exposing the firm to the higher levels of interest-rate risk that accompany long-term debt. The
lower-rated (higher-risk) firm issues short-term debt,
then swaps to pay a fixed rate and receive floating. The
short-term debt remains outstanding. There exists no
adverse incentive to underinvest because gains from
investment accrue to shareholders, nor is there any
incentive to shift toward higher-risk investment because any such shift would be penalized by an increase
in the risk premium on the still-outstanding short-term
debt. The swap thus insulates the firm from changes in
the level of interest rates generally, but the firm still
pays a premium for any increase in firm-specific risk.'^

'^Callable bonds reduce the agency problem by allowing the firm to

recontract after it demonstrates that it is following a low-risk investment strategy. Wall [22] shows that callable bonds may not eliminate
this agency problem because the firm may not call the bonds in all
states, even if it follows the correct investment policy. In some states
the increase in the risk-free rate will exceed any decrease in firmspecific risk premiums, and it will not be profitable for the firm to call
its bonds.

63

Hence, as Wall suggests, the ability of short-term debt

to reduce agency costs is maintained even after the
swap.
If a combination of short-term debt and swaps can
reduce the adverse incentive problem, then a firm can
insulate itself from interest-rate changes without paying the full quality spread normally associated with
long-term funds. Under such circumstances, swaps would
reduce agency costs, a real (not illusory) saving. The
swap would reduce debt financing costs without a fully
offsetting disadvantage, such as an increase in the equity capitalization rate. In this case swaps will appear to
be arbitraging quality spread differentials, although
referring to this process as "arbitrage" is inappropriate
because the agency cost explanation does not rely on
market inefficiencies or segmentation. Moreover, explanations of swaps based on agency costs could explain the continuing growth of the swap market, since
the use of short-term debt and a swap by one firm does
not reduce the potential gains to another firm.
Agency cost and arbitrage-based explanations could,
in principal, be tested by decomposing the QSD into its
various determinants. Chatfield and Moyer [6] provide
some insight as to the components of the QSD. They
examine the risk premium on 90 long-term puttable
bonds and a control sample of 174 non-puttable bonds.
The put option on long-term debt gives creditors the
option to force the firm to repay its debt if the firm
becomes more risky. After controlling for the value of
the interest rate option on puttable, fixed-rate bonds,
the study found that the put feature reduces the market
required rate on long-term debt by 89 basis points. This
finding suggests that the QSD cannot be due entirely
to market inefficiency. However, the observed saving
on puttable bonds could reflect differences in expected
bankruptcy costs or risk shifting from creditors to owners, as well as agency costs. Thus, the Chatfield and
Moyers results cannot be used to determine the magnitude of the agency cost savings due to the use of
short-term debt and an interest rate swap.
E. Summary of QSD Arbitrage

From the forgoing discussion, observed quality spread

differentials can be explained by: (i) differences in the
risk borne by equity holders; (ii) differences in the
discounted value of expected bankruptcy costs; (iii)
differences in restrictive covenants and options; and
floating rate in a swap agreement is solely a function of some
market interest rate such at the Treasury bill rate or LIBOR (tx)ndon
Inter-Bank Offer Rate).

64

(iv) agency costs. Any portions ofthe QSD attributable

to factors (i), (ii) and (iii) are not exploitable for economic gain. Any apparent gains from attempts at such
exploitation, by interest rate swaps or other means, are
illusory. Swaps in particular would represent a zerosum game, with gains to one party possible only at the
expense of another party. On the other hand, to the
extent that QSDs are attributable to factor (iv), opportunities for real gains via swaps would exist.
The QSD may arise from any of the above four
factors (and perhaps others), either individually or in
combination. Thus, even if a combination of shortterm debt and swaps has lower agency costs than does
long-term debt, the full amount ofthe QSD may not be
exploitable. For example, if the QSD is 70 basis points,
perhaps only 30 basis points are due to agency costs,
and the remaining 40 basis points to other, non-exploitable, factors.

II. Other Motives for Swaps

The above analysis suggests that quality spread differentials may or may not be exploitable. However, the
usefulness of swaps is not dependent solely on their
ability to exploit QSDs. Swaps may serve other purposes, even if exploitable components of QSD are
trivial or nonexistent.
A. Adjusting the Amount of Debt

Smith, et al. [16] note that the optimal debt level for
a firm may vary over time as circumstances change. The
potential for the optimal amount of debt to decrease
poses particular problems for firms that need to obtain
fixed-rate funding to avoid interest rate risk. If the debt
is issued in the form of long-term bonds, then the bonds
may be redeemable only at some premium over their
market value and with significant transaction costs.
Swaps, on the other hand, may be undone with no call
premium and lower transaction costs.
B. Expioiting Information Asymmetry

Arak, Estrella, Goodman, and Silver [1] discuss sufficient conditions for firms to choose the combination
of short-term debt and an interest rate swap over shortterm debt, long-term fixed rate debt, and long-term
variable rate debt. The model of Arak, et al. is very
general and the authors note that agency cost arguments may be treated as a subset of their model. Another testable implication that arises from their model
is that managers may combine short-term debt and
swaps to exploit information asymmetries. For example.

FINANCIAL MANAGEMENT/SUMMER 1989

a firm's management may feel on the basis of inside

information that the market is imposing an excessive
risk premium on the firm's debt, and that once the
information is released, the firm's interest rate will
decline. If the firm issues short-term debt, its risk premium may fall when the information is revealed, but in
the meantime the firm is exposed to interest rate risk.
A swap would allow managment to exploit its inside
information to reduce the financing costs without exposing the firm to interest rate r i s ^ *
C. Tax and Regulatory Arbitrage

Interest rate swaps also may be used to exploit differences in the cost of issuing debt between different
markets. Loeys [12] estimates that the cost of meeting
SEC requirements and other costs of issuing bonds in
the United States adds an average of approximately 80
basis points over and above the cost of a comparable
Eurodollar issue. Some of these costs could be saved if
the firm with access to the Eurodollar markets issued
long-term bonds in that market, the other firm issued
short-term debt domestically, and the two firms then
swapped.
D. Adjusting the Repricing Interval of Debt

The analysis of swaps as a means of exploiting the

quality spread differential posits a situation in which a
firm desiring fixed-rate financing instead raises floating-rate funds and then swaps. The counterparty desires floating, but issues fixed and then swaps. Each
party thus plans the swap as a central part of a financing
strategy. Contrast the foregoing motive with that of a
firm that entered into what it considered an appropriate financing, and then subsequently found a change
desirable in the repricing interval of debt. Here the
motive is one of interest-rate risk management rather
than cost reduction.
Financial intermediaries in particular may find swaps
useful for adjusting repricing intervals. For example.
Smith, et al. [17] suggest that savings and loan associations may have a comparative advantage in attracting
short-term deposits and making long-term mortgage
loans. Swaps allow savings and loans to exploit their
comparative advantages with reduced exposure to interest rate changes.

'''Callable bonds have also been suggested as a method of exploiting

inside information by Robbins and Schatzberg [15]. However, Wall
[22] demonstrates that callable bonds fail to provide a separating
equilibrium if a small change is made in their model.

WALL AND PRINGLE/EXPLANATIONS OF INTEREST RATE SWAPS

Interest rate swaps likewise provide non-financial

firms a low-cost method of rapidly changing the effective repricing intervals of their liabilities. A swap
agreement can be entered into on short notice and at
minimal transactions costs. Moreover, by combining
swaps of different maturities (or having a financial
intermediary combine swaps) a firm can hedge assets
that do not yet exist. Interest rate futures and options
may be used for these same purposes, but, unlike these
other instruments, an active swaps market exists for
maturities greater than three years.
Thus swaps can be useful to a variety of financial and
non-financial firms for adjusting debt repricing intervals. Note that a swap used in this way provides benefits
to both swapping parties but that the benefits in no way
depend on the existence of a quality spread differential.

III. Empirical Implications

Each of the alternative explanations described above
suggests that some types of firms will choose to be
fixed-rate payers, or that other types of firms will be
floating-rate payers, or both. The relative explanatory
power of the various theories may be examined in a very
rough sense by determining the number of firms that
correspond with the restrictions suggested by each theory.
The arbitrage explanation posits the lower-rated
firm as the fixed-rate payer and the higher-rated firm
as the floating rate payer. The agency-cost explanation
also requires that the lower-rated firm pay a fixed-rate
of interest, and places no constraints on the counterparty. The agency cost savings are solely attributable to
changes in the behavior of the lower-rated firm. The
other side of the swap may be taken by a swap dealer
that either does not hedge its swap or hedges the swap
in the cash or futures market. (For a discussion of
hedging swaps in the cash and futures markets see
Felgran [9] and Wakeman [21].) However, if a higherrated firm uses a swap then the agency cost explanation
suggests it will be a floating-rate payer.
The downsizing hypothesis implies that the firm has
some reason to expect that its optimal amount of outstanding liabilities may shrink. Management's subjective probability that the firm will shrink in the future is
not observable. However, expectations of future size
changes may be related to historic decreases in firm
size. That is, firms that have experienced significant
reductions in size in the past may be more likely to
desire reductions in their liabilities in the future.
With respect to the asymmetric information motive,
Arak, et al. [1] suggest that a firm expecting a ratings

65

upgrade might enter into a swap as a fixed-rate payer,

planning later to undo the swap and issue long-term
debt at the higher rating. While the expectations of
firms' managers are not observable, the number of
firms expecting a change in rating should approximately equal the number of firms that actually experience a
change if the expectations of the firms' managers are
unbiased.
The swap explanation based on adjusting the repricing interval suggests that savings and loans should be
significant participants in the interest rate swap market. This explanation may also explain the presence of
other financial and nonfinancial corporations. Unfortunately, measuring the exposure of a firm to changes
in market interest rates is difficult if not impossible.
Moreover, firms may use swaps to hedge changes in
interest rates or to speculate on rate changes.^^ Thus,
there is no obvious set of criteria that would capture all
of the firms that might be using swaps to adjust the
effective repricing interval of their outstanding debt.
The use of swaps to arbitrage differences in tax and
regulatory structures depends on specific differences
across countries. Thus, eaeh example of tax and regulatory differences needs to be examined independently.
A. Data

The initial list of possible swap users was obtained

from a search of the National Automated Accounting
Researeh System (NAARS) database of corporate annual reports maintained by the American Institute of
Certified Public Aeeountants in New York (AICPA).!^
This file contains over 4000 firms in 1986 from the New
York Stock Exchange, American Stoek Exchange, OverThe-Counter companies that are on the Federal Reserve's list of stoeks eligible for margin, the Fortune
500, and Fortune 500 service corporations. We performed a search of this database to identify those corporations that report the use of "interest rate swaps"
or "interest rate exchange agreements."^' This search turned
up 298firmsand printed part ofthe relevant footnotes for
eaeh eorporation (the display format used was "KWIC").
''Swaps might in some cases be used for multiple motives, and after
the fact it may not be possible to determine unambiguously which
motive(s) operated. For example, suppose a firm issued short-term
debt to fund a long-term project in anticipation of a ratings upgrade.
This firm might subsequently enter into a swap if interest rate volatility increased. Such a swap would appear to be an attempt to adjust
the repricing interval of its debt when in fact the original motive
involved information asymmetry.
''Our search was conducted by Hal Clark at AICPA but the database
is also accessible to users of LEXIS.

FINANCIAL MANAGEMENT/SUMMER 1989

66

Exhibit 1. Firms with Interest Rate Swap Agreements by Swap and User Type
User Type
Commercial Bank
Thrift
Other Financial
Manufacturing
Non-financial & Non-manufacturing
Total

Dealer"
20
0
2
0
0
22

Swap Type
Fixed-Rate
Floating-Rate
Payer
Payer
9
22
10
37
49
127

3
4
5
10
4
26

Both"

NA'

Total

7
4
3
1
1
16

33
7
3

72
37
23
54
64
250

6
10
59

''A firm that enters into swaps to earn fee income.

''A firm that has entered into both fixed and floating rate swaps.
indicates that swap type is not available from the firms' annual report.

The NAARS printout was sufficient for our purpose

here if it met three conditions: it clearly indicated
whether the firm used an interest rate swap; it clearly
indicated what position the firm was taking in the swap
market (i.e., floating-rate payer, fixed-rate payer, both
fixed and floating-rate payer or dealer); and it indicated
the notional principal of the firm's outstanding swap
or swaps. In cases where these three conditions were
not met, the full text ofthe corporation's annual report
was reviewed to obtain additional information. Following these procedures, a total of 250 swap market participants were identified for 1986. The type of swap or
swaps being used by the firm could not be identified in
59 cases. A list of the firms in the sample is presented
in Appendix B. The 250 swap users also were matched
against the list of firms on the Compustat tapes (the
Primary, Secondary, Tertiary, OTC, and Research tapes).
This search yielded a total of 188 firms for which additional financial information was available.
B. Results

The number of swap users identified by NAARS is

given by industry category in Exhibit 1. Exhibit 1 also
breaks the type of swap usage into five categories:
dealers (firms that enter into swaps to earn fee income),
fixed-rate payers, floating-rate payers,firmspaying a fixed
rate on some swaps and floating rate on others, and
those whose usage type is not available.!^ A far larger
proportion of the sample consists of fixed-rate payers
"The specific search request took the form: DB/S = 1986 AND
(INTEREST W/2 RATE W/8 SWAP OR EXCHANGE) NOT W/5
((SECURITY W/3 COMMISSION) OR SEC OR FOREIGN CURRENCY). The foreign currency restriction is included to eliminate
currency swaps. One irrelevant annual report is dropped by the SEC
restriction.

(50% of the total sample) than of floating-rate payers

(10%). This result could be obtained if a large number
of the floating-rate payers are foreign firms. Another
possibility is that swap dealers are taking the position
as a floating-rate payer and hedging the interest rate
risk in the cash and futures markets.
The results in Exhibit 1 suggest that over 50% ofthe
swap market participants are banks, thrifts, or other
financial services providers. Moreover, over 25% ofthe
market is accounted for by commercial banks. The
annual reports of many of the banks in the sample
report the use of swaps to manage interest rate risk
without specifying whether the bank is a fixed or floating-rate payer. The overwhelming majority of thrifts
(59%), manufacturing firms (69%), and non-financial,
non-manufacturing firms (77%) are exclusively fixedrate payers.
Exhibit 2 presents descriptive statistics for the swap
users by industry category. As shown, commercial banks
are by far the heaviest users of interest rate swaps in
relation to total assets. This may largely reflect the role
of the 20 swap dealers in undertaking swaps for their
customers. The thrift users of swaps have the highest
return on equity of any of the industry categories in
1986 and had swaps outstanding equal to approximately 10% of their total assets. Interest rate swaps are a
low proportion of the assets of other financial services

'*In two cases NAARS listed subsidiaries of larger corporations as

interest rate swap users. In these two cases the parent is identified as
the swap user rather than the subsidiary. The change in the identification of the swap user forced two additional changes; the swap type is
set to "not available" and the notional principal is not included. These
changes are necessary because information of the parent's use of
interest rate swaps is not available.

WALL AND PRINGLE/EXPLANATIONS OF INTEREST RATE SWAPS

67

Exhibit 2. Firms with Interest Rate Swap Agreements; Finaneial Data by User Type
Commercial
Bank
Total Assets
$25,761
Sales (Revenue)
$ 2,574
Current Debt to Assets
16.7%
Long-term Debt to Assets
5.4%
Return on Equity
10.2%
Swap Amount
$ 8,883
Swap to Total Assets
34.4%

Thrift

User Type
Other
Financial

Manufacturing

NonManufacturing

$9,231
$ 908
17.6%
15.6%
16.6%
$ 857
9.3%

$31,307
$ 5,549
47.6%
20.7%
15.4%
$ 374
1.2%

$3,173
$3,303
3.6%
25.6%
8.5%
$ 162
5.1%

$4,382
$2,963
9.1%
29.9%
8.0%
$ 193
4.4%

Mean of all
Reported Users
$12,717
$ 2,973
21.2%
12.7%
9.8%
$ 1,738
13.7%

All dollar figures in thousands of dollars.

firms. The manufaeturing firms in the sample are large,

with an average revenue typical of a Fortune 500 eompany. The manufaeturing and non-manufaeturing, nonfinaneial firms have average ratios of swaps to total
assetsof 4 to5%.
Exhibit 3 presents 1986 Standard and Poors bond
ratings by swap user type. Swap dealers tend to be rated
and to have higher ratings. Over half of eaeh of the
other categories eontains firms that do not have publiely rated bonds.
C. Interpretation

The empirieal evidence on eaeh ofthe swap theories

needs to be interpreted with eaution beeause the various
explanations for swap usage are not mutually exelusive.
One eannot assume that a partieular observation is
explained by a partieular theory merely beeause the
observation is eonsistent with the theory. Another theory
also might explain the firm's behavior. Moreover, finding an observation that eontradiets the restrietions
imposed by a theory does not necessarily invalidate a
theory. For example, the finding that some lower-rated
firms pay a floating rate of interest does not suggest
that the arbitrage explanation of swaps is invalid; the
lower-rated firms may be trying to hedge outstanding
debt. Thus, the results presented here at best provide
an upper bound on the proportion of swaps that may
be explained by any partieular theory.
Insofar as bond ratings are available for swap partieipants, they tend to support the arbitrage and ageney
eost explanations of interest rate swaps. Of the fixedrate payers with rated bonds outstanding, 86% are
rated A+ or lower, whereas 50% of the floating-rate
payers are rated AA- or better. However, some of the
observations are elearly not a result of arbitrage or
attempts to reduee ageney eosts. Six firms are paying a

fixed rate of interest and have a credit rating of AA- or

better and five firms are paying a floating-rate and have
eredit ratings of BB or lower.^'^
Smith, et al. argue that one motive for swaps is to
faeilitate shrinking the size ofthe firm by making it easy
to reduee debt. To determine how often this motive
might operate, we looked at annual ehanges in total
assets of fixed-rate payers over 1976-1988 and pieked
those years with the largest percentage declines. The
annual decrease in assets for eaeh year in the period
was calculated using data from Compustat. The largest
annual decrease exceeds 10% for 24 of the 95 firms in
the analysis. An additional 18 firms experienced a drop
in total assets greater than 5% and less than 10%.
However, this explanation (faeilitating debt reduction)
appears to be incapable of explaining a large fraction
of the activity of fixed-rate payers. The largest drop in
assets for 27 firms is less than 5% and an additional 26
firms did not experience a drop in assets over the entire
period.
The data also are consistent with the hypothesis that
swaps may be used to exploit information asymmetries.
As shown in Exhibit 4, the entire sample eontains 98
firms with rated debt in 1986 and 1988, of whom 23
experieneed upgrades and 26 experienced downgrades.^*^
If managers are using swaps to defer issuance of longterm debt in anticipation of a future deeline in interest

"Two of the higher rated fixed-rate payers, Mobil Corporation and

Westinghouse Electric Corporation, experienced ratings upgrades,
which is consistent with the information asymmetry explanation of
swaps.
obtained from the Standard and Poors Bond Guide.
The 1986 ratings were obtained from the December 1986 issue and
the 1988 ratings from the May 1988 issue.

FINANCIAL MANAGEMENT/SUMMER 1989

68

Exhibit 3. Firms with Interest Rate Swap Agreements by Swap Type and Credit Rating
User Type

Dealer

AAA
AA+
AA
AAA+
A
ABBB +
BBB
BBBBB +
BB
BBB+
B
BCCC
C
D
NR

1
2
7
1
3
1
0
0
2
1
0
0
0
0
0
0
0
0
0
4

Swap Type
Fixed-Rate
Floating-Rate
Payer
Payer
1
0
2
3
6
1
5
1
10
1
2
2
3
1
1

2
0
2
2
0
0
1
0
0
0
0
1
1
1

1
1
0
0
14

0
1
0
84

Both

NA

Total

1
1
0
1
2
0
0
0
0
0
0
0
0
0
0
0
0
0
0
10

1
0
3
2
3
5
4
5
0
1
0
0
0
1
1
0
0
0
0
34

6
3
14
9
14
7
10
6
12
3

2
3
4

3
2
4
1
1
0
146

Ratings are from Standard and Poors Bond Guide, December 1986.

rates, there should be a higher proportion of upgrades

among fixed-rate payers than among the remainder of
the sample. As shown, sueh is the ease, with 36% of
fixed-rate payers (14 of 39) experiencing upgrades versus 15% ofthe remaining firms (9 of 59). Assuming the
sample seleetion to be unbiased, the difference in the
two percentages is statistically significant at eonventional levels (the test statistic equals 2.08).^! Moreover,
the difference in upgrades does not merely indicate that
fixed-rate payers are more likely to experienee a rating
change. The proportion of downgrades is essentially
the same across the entire sample25% for fixed-rate
payers, 28% for remaining firms (not a significant difference).
The foregoing conclusions regarding information
asymmetries are very tentative beeause only actual ratings ehanges are observed over 1986-1988, whereas the
decision to use a swap depends on management's expectations of a ratings upgrade over the entire life of
disclosure is discretionary, firms that experienced a rating
upgrade may be more inclined to disclose swap usage (since management's decision looks good) that firms that experienced downgrades.
Any such bias in the selection of our sample would favor a finding
supporting the information asymmetry hypothesis.

the swap. Some of the upgrades may also reflect changes in investment policy due to the reductions in agency
costs associated with the use of short-term debt.
The data also support the hypothesis that swaps are
used by some firms to adjust the reprieing interval of
outstanding debt. In partieular, the high proportion of
savings and loans that are fixed-rate payers in swaps
supports this eonclusion.
Thus, the analysis of swap users yields data eonsistent with each of the theories of interest rate swap
usage. Most of the firms with rated debt use swaps in a
manner consistent with the arbitrage and agency cost
explanations. At the same time, at least 42 of 95 firms
experienced declines in total assets of 5% or more,
suggesting that some firms may use swaps to help reduce the costs of shrinking. Further, firms paying a
fixed rate of interest are more likely than other swap
users to experience a ratings upgrade, as predicted by
the information asymmetry hypothesis. Finally, the heavy
use of swaps by thrifts is consistent with the reprieinginterval (maturity-adjustment) hypothesis. Thus, no
single explanation is capable of explaining all swap
usage. Each explanation finds some support, but at the
same time most of the theories are contradicted by at
least some observations.

WALL AND PRINGLE/EXPLANATIONS OF INTEREST RATE SWAPS

Exhibit 4. Firms With Rated Debt in 1986 and 1988

Total Rated

Upgrades

Downgrades

98
39
59

23
14
9

26
11
15

Total Firms
Fixed-Rate Payers
Remainder

IV. Conclusions
This study reviews various explanations for the development of the interest rate swap market and examines the characteristics of firms that disclose the use
of interest rate swaps in their annual reports. A popular
explanation is that firms use swaps to arbitrage the
quality spread differential. As argued here and elsewhere, the apparent benefits of QSD arbitrage are
illusory. Other motives for swap usage that can produce real benefits include reducing the agency costs of
long-term debt, reducing the costs of shrinking the
firm, exploiting infonnation asymmetries, adjusting the
repricing interval of outstanding debt, and tax and
regulatory arbitrage.
The survey described in this paper identifies 250
firms that report the use of swaps in their 1986 annual
reports. Analysis of the data provides some support for
each of the explanations for swap usage. Further research on this topic would be desirable given the increasing importance of swaps in the financial markets.
However, future research will require a careful design
as it appears that no single explanation of swaps is
capable of explaining the behavior of all swap users.
Indeed, some firms appear to have characteristics exactly opposite to that predicted by particular theories.

References
1. M. Arak, A. Estrella, L. Goodman, and A. Silver, "Interest Rate
Swaps: An Alternative Explanation," Financial Management (Summer 1988), pp. 12-18.
2. A. Bamea, R.A. Haugen and L.W. Senbet, "A Rationale for
Debt Maturity Structure and Call Provisions in the Agency
Theoretic Framework," Joumal of Finance (December 1980),
pp. 1223-1234.
3. J. Bicksler and A.H. Chen, "An Economic Analysis of Interest
Rate Swaps," Joumal of Finance (July 1986), pp. 645-^55.
4. H. Bierman and J.E. Hass, "An Analytical Model of Bond Risk
Differentials," Joumal of Financial and Quantitative Analysis
(December 1975), pp. 757-773.
5. Z. Bodie and R.A. Taggart, "Future Investment Opportunities
and the Value of the Call Provision on a Bond," Joumal of
Finance (September 1978), pp. 1187-1200.
6. R.E. Chatfield and R.C. Moyer, "Putting Away Bond Risk: An

69

Empirical Examination ofthe Value ofthe Put Option on Bonds,"

Financial Management (Summer 1986), pp. 26-33.
7. R. Chiang and R.W. Kolb, "An Analytical Model of The Relationship Between Maturity and Bond Risk Differentials," Financial Review (May 1986), pp. 191-209.
8. E.E. Comiskey, C.W. Mulford, and D.H. Turner, "Bank Accounting and Reporting Practices for Interest Rate Swaps," Bank
Accounting and Finance (Winter 1987-1988), pp. 3-14.
9. S.D. Felgran, "Interest Rate Swaps: Use, Risk and Prices," New
England Economic Review (November/December 1987), pp. 22
32.
10. D. Jackson, "Swaps Keep In Step With the Regulators," Financial Times (August 10,1988), p. 22.
11. M.J.L. Jonkhart, "On the Term Structure of Interest Rates and
the Risk of Default: An Analytical Approach,"/oKma/ of Banking and Finance (September 1979), pp. 253-262.
12. J.G. Loeys, "Interest Rate Swaps: A New Tool For Managing
Risk," Business Review (May/June 1985), pp. 1725.
13. D. Mayers and C.W. Smith, "Corporate Insurance and the Underinvestment Problem," Joumal of Risk and Insurance (forthcoming).
14. S.C. Myers, "Determinants of Corporate Borrowing,"yoM/7ja/o/
Financial Economics (November 1977), pp. 147176.
15. E.H. Robbins and J.D. Schatzberg, "Callable Bonds: A Risk
Reducing, Signalling Mechanism," Joumal of Finance (September 1986), pp. 935-949.
16. C.W. Smith, C.W. Smithson, and L.M. Wakeman, "The Evolving
Market for Swaps," Midland Corporate Finance Review (1986),
pp. 20-32.
17.
, "The Market for Interest Rate Swaps," Financial Management (Winter 1988), pp. 34-^4.
18. C.W. Smithson, "A LEGO Approach to Financial Engineering:
An Introduction to Forwards, Futures, Swaps and Options,"
Midland Corporate Finance Review (Winter 1987), pp. 16-28.
19. R.M. Stuiz and H. Johnson, "An Analysis of Secured Debt,"
Joumal of Financial Economics (December 1985), pp. 501521.
20. S.M. Turnbull, "Swaps: A Zero Sum Game?" Financial Management (Spring 1987), pp. 15-21.
21. L.M. Wakeman, "The Portfolio Approach to Swaps Management," Unpublished Working Paper, Chemical Bank Capital
Markets Group, May 1986.
22. L.D. Wall, "Alternative Financing Strategies: Notes Versus Callable Bonds," Joumal of Finance (September 1988) 1057-1065.
23.
, "Interest Rate Swaps in an Agency Theoretic Model
With Uncertain Interest Rates," Joumal of Banking and Finance
(forthcoming).
24. L.D. Wall and J.J. Pringle, "Interest Rate Swaps: A Review of
the Issues," Economic Review of the Federal Reserve Bank of
Atlanta (November/December 1988).
25. J.G. Whittaker, "Pricing Interest Rate Swaps in An Options
Pricing Framework," Federal Reserve Bank of Kansas City Research Working Paper RWP 87-02 (May 1987).
26. J.B. Yawitz, "An Analytical Model of Interest Rate Differentials
and Different Default Recoveries," Joumal of Financial and
Quantitative Analysis (September 1977), pp. 481-490.

70

FINANCIAL MANAGEMENT/SUMMER 1989

Exhibit 1 A. Numerical Example of a Quality Spread

Differential
Alpha
Corporation

Beta
Corporation

Credit rating

AAA

BBB

Cost of Raising
Fixed-Rate Funding

tO.80%

U.00%

6-month
LIBQR
plus t/4%

6-month
LIBOR
plus 3/4%

Costs of Raising
Floating-Rate Funding

Quality Spread
Differential

Exhibit 2A. Numerical Example of a Swap's Ability

to Reduce a Firm's Cost of Funding

Quality
Spread

Alpha
Corporation
Direct Funding Cost
Fixed-rate funds
raised directly by Alpha

Beta
Corporation

(tO.80%)

t.20%
Floating-rate funds raised
directly by Beta
0.50%

Swap Payments
Alpha pays Beta
floating rate

(6-month LIBQR
-1- 3/4%)

(LIBQR)

LIBQR

10.90%

(10.90%)

All-in cost of funding

LIBQR -1/10%

11.65%

Appendix AThe Quality Spread

Differentiai

Comparable cost of
equivalent direct funding

LIBQR + t/4%

12.00%

The quality spread represents the premium that a

lower quality credit must pay over a higher rated credit
for funds of the same denomination and maturity. Quality
spreads between different rating classes are generally
observed to increase with maturity. This increase is
captured by the quality spread differential, which is the
difference between the quality spread at two different
maturities, long and short.
An example of the quality spread differential and
the use of interest rate swaps to exploit differenees in
quality spreads is given in Exhibit IA. Alpha Corporation in this example has a AAA credit rating and desires
floating-rate financing. Alpha without a swap would pay
the six-month Lx)ndon Inter-Bank Qffer Rate (LIBQR),
plus 0.25% for its floating-rate funds. Alpha ean obtain
fixed-rate funds at 10.80%. Beta has a BBB rating and
desires fixed-rate funds. It can borrow at a floating rate
of six month LIBQR plus 0.75% and at a fixed-rate of
12.00%.
Note that Alpha can obtain floating-rate funds at 50
basis points less than Beta and ean obtain fixed-rate
funds at an even greater savings of 120 basis points. The
difference between Alpha's advantage in fixed-rate funds
and its advantage in floating-rate funds is the quality
spread differential, 70 basis points in this example.

Savings

35 basis points

35 basis points

0.70%
Beta pays Alpha
fixed rate

This example is taken from the Supplement to Euromoney, January

1986, p. 95.

Exhibit 2A shows how the two firms ean exploit the

QSD via an interest rate swap. Alpha issues fixed-rate
debt. Beta issues floating-rate debt, and the two firms
then swap. The bottom of Exhibit 2A gives the cost
savings to each firm via the swap. Alpha obtains floating-rate funds at LIBQR minus 0.10%, which is a 35
basis points saving compared to the rate it would pay if
it had issued floating-rate debt. Beta obtains fixed-rate
funds at 11.65%, which also is a 35 basis points saving
over its alternative without the swap. The QSD of 70
basis points thus has been divided between the two
firms, with each reducing its finaneing eosts by 35 basis
points. The equal division of the QSD in this example
is entirely arbitrary; it could be divided by the two firms
in any way they wished. In all eases, the aggregate
savings to the two parties combined will equal the
QSD.

71

WALL AND PRINGLE/EXPLANATIONS OF INTEREST RATE SWAPS

Appendix BList of Swap Users In 1986

Firm
Advest Group Inc.
Alaska Mutual Bancorp.
Alexander & Alexander
Allen Group
Amax Inc.
American Continental Corp.
American Express
American Motors Corp.
AMR Corp.-Del
Asarco Inc.
Associated Dry Goods Corp.
Badger Meter Inc.
Baltimore Bancorp.
Bane One Corp.
Bank Of Boston Corp.
Bank Of New England Corp.
Bank Of New York Co. Inc.
Bankamerica Corp.
Bankers Trust New York Corp.
Barnes Group Inc.
Baxter Travenol Lab. Inc.
Boston Five Cent Savings Bank
Branch Corp.
Brenton Banks Inc.
Buckeye Financial Corp.
Burlington Northern Inc.
California First Bank
Care Enterprises-Cl. B
Centerre Bancorporation
Centrust Savings Bank-Miami
Chase Manhattan Corp.
Chemical Banking Corp.
Chicago Pneumatic Tool Co.
Chili's Inc.
CIT Group Holdings Inc.
Citicorp
Citizens & Southern Corp.-GA
Citytrust
Club Med Inc.
CNW Corp.
Coast Fed. Savings & Loan Assoc.
Coast Savings & Loan Assoc.
Coastal Corp.
Comerica Inc.
Conquest Exploration Co.
Continental Illinois Corp.
Continental Mtg. Investors
Corestates Financial Corp.
Cronus Industries Inc.
Crossland Savings FSB
Dallas Corp.
Dayco Corp.
Dominion Bankshares Corp.
Downey Savings & Loan Assoc.
EAC Industries
El Paso Electric Co.

Type

FIX''

Notional Principal"
27.5

F/F'
F/F
FIX
FIX
FIX

27
140
100

FIX
FIX
FIX
FIX
FIX

250
100
12.4
125
5

DEL

2000

DEL
DEL
DEL
FIX
FIX

2800

FLO''
FIX
FIX

40
5
85
250

FLO

25

FIX
DEL
DEL
FIX
FIX
FLO
DEL
FIX

465
22000

20
100

17
600
63400
245.2

FLO
FIX
FIX
FLO
FIX

39.6
100
25
63.6
1080

DEL
FIX

10
4920
30

FIX
FIX

350
40
20

FLO

70

FIX

Firm
Endata Inc.
Engelhard Corp.
Enron Corp.
Enserch Corp.
Equitable Bancorporation
Exchange Int'l Corp.
Far West Financial Corp.
Farm & Home Savings Assoc.
Farri-Centers Of America Inc.
Federal Nat'l Mortgage Assoc.
Fidelcor Inc.
Financial Corp. Of America
Financial Corp.-Santa Barbara
First American Corp.-TN
First Bank System Inc.
First Boston Inc.
First Chicago Corp.
First City Bancorp (TX)
First Empire State Corp.
First Federal Of Michigan
First Indiana Corp.
First Interstate Bancorp.
First Southern Fed. S&L Assoc.
First Tennessee Nat'l Corp.
First Wisconsin Corp.
Fischer & Porter Co.
Fleet Financial Group Inc.
Florida Nat'l Banks Of FL
FMC Corp.
Foothill Group Inc.-Cl. A
Foxboro Co.
Freeport McMoran Inc.
Fuller (H.B.) Co.
G.T.C. Financial Services Corp.
Geico Corp.
General Homes Corp.
Gibraltar Financial Corp.
Golden West Financial Corp.
Goodyear Tire & Rubber Co
Gottaas Larsen Shipping Corp.
Grantree Corp.
Great Am. First Savings Bank
Great Lakes Fed. S&L Assoc.
Great Northern Nekoosa Corp.
Great Southern Fed. Savings Bank
Great Western Savings Bank
Greyhound Corp.
Guarantee Financial Corp. of CA
Hasbro Inc.
Heico Corp.
Home Federal S&L Assoc.-SD
Homestead Financial Corp.-CI. A
Huntington Bancshares
Indiana National Corp.
Inspiration Resources
Int'l Lease Finance Corp.
Intel Corp.
Int'l Minerals & Chemical
IU International Corp.
James River Corp. Of Virginia
JWT Group Inc.

Type
FIX

Notional Principal

FIX
FIX

5
98.3
500
100

FLO

98

FIX

FIX
FIX

4300
287.5

DEL
DEL
DEL
FLO
F/F
F/F
FIX
DEL
FIX

195
221
1500
100
3600
148
274

FIX
F/F
FIX
FLO
FIX
FIX
FIX
FIX
FIX
FIX
FLO
F/F
FIX
FIX

1275
50
30
150
15
10
61
50
1470
1200
1407
20

FIX
FLO
FIX
FIX
FIX
FIX
FLO
FIX
FIX
F/F

178
50
72
350
38.6
50
3
1054

FIX
FLO
FIX
FIX

55
50

FIX

80
11.
20

FIX
FIX

72

FINANCIAL MANAGEMENT/SUMMER 1989

Firm

Type

Kaiser Aluminum &

FIX
Chemical Corp.
FIX
Lennar Corp.
FIX
Leucadia National Corp.
FIX
Lockheed Corp.
FIX
Lone Star Industries
FIX
M/A-Com. Inc.
DEL
Manufacturers Hanover Corp.
Marine Corp.
DEL
Marine Midland Banks Inc.
Mcdonald's Corp.
FLO
Mcorp
Mead Corp.
DEL
Mellon Bank Corp.
Merchants National Corp.
Meridian Bancorp. Inc.
FIX
Meritor Financial Group
FLO
Merrill Lynch & Co.
Metropolitan Financial Corp.-Del FIX
Michigan National Corp.
FIX
Middle South Utilities
FIX
Milton Roy Co.
FLO
Minnesota Mining & Mfg. Co.
FIX
Mitchell Energy & Dev.
FIX
Mobil Corp.
Mohawk Data Sciences Corp.
FIX
Moore Financial Group Inc.
FIX
MOR-FLO Inds.
DEL
Morgan (J.P.) & Co.
FIX
Multimedia Inc.
Mutual Benefit Life Insurance Co. FIX
F/F
National Bancshares Corp. TX
National City Corp.
DEL
NBD Bancorp. Inc.
New Hampshire Savings Bank Corp.
FIX
Niagara Mohawk Power
FIX
Nicor Inc.
Northeast Savings F.A.
FIX
F/F
Nonvest Corp.
FIX
Old National Bancorporation
F/F
Old Stone Corp.
FIX
One Rancorp
FIX
Pacific First Financial Corp.
Pacific Gas & Electric
Pacific Resources Inc.
REV
FIX
Pacific Telecom Inc.
FIX
Pacificorp
Paine Webber Group
DEL
FIX
Payless Cashways Inc.
FIX
Pentair Iiic.
Peoples Bancorporation
FLO
Pepsico Inc.
FIX
Perpetual Savings Bank
FIX
Pioneer Standard Electronics
PNC Financial Corp.
F/F
Portland General Corp.
FIX
Primark Corp.
Prudential Bancorporation
Prudential Financial Service Corp. F/F
Puget Sound Bancorp.
FIX
Pulaski Furniture Corp.

Notional Principal
190
50
200
100

26.5
37500
246.3
4058
185

1520
115

236.3
8
100
75
100
20
10

40400
395
800
105

1268.4

50
375

729.1
250
200

35
40
50
347
25
25
35
418
15

40

79.4
74

174.5
8

Firm
Rainier Bancorporation
Republic New York Corp.
Reynolds & Reynolds-CL A
Reynolds Metals Co.
Rochester Telephone Co.
Rogers Corp.
Ryland Group Inc.
Safeco Corp.
Salomon Inc.
Savannah Foods & Inds.
Scherer (R.P.)
Scott Paper Co.
Scripps Howard Broadcasting
Sears, Roebuck & Co.
Security Pacific Corp.
Shawmiit National Corp.
Signet Banking Corp.
Siliconix Inc.
Society Corp.
Sooner Federal S&L Assoc.
South Carolina Nat'l Corp.
Southeast Banking Corp.
Southland Corp.
Southwest Gas Corp.
Southwestern Energy Co.
Sovran Financial Corp.
Standard Oil Co.
Student Loan Mktg.
Subaru of America
Sumitomo Bank Of CA
Sun Electric Corp.
Super Food Services Inc.
Syntex Corp.
TCA Cable TV Inc.
Tenneco Inc.
Texas Commerce Bancshares
Texas Instruments Inc.
Thorn Apple Valley Inc.
Times Mirror Co.-Del
Total Petroleum Of N. America
Transamerica Corp.
Transcanada Pipelines Ltd.
transcapital Financial Corp.
Tribune Co.
Trinova Corp.
U.S. Surgical Corp.
UAL Inc.
UGI Corp.
Union Bank
Union Bankers Inc.
Union Carbide Corp.
Union Gas Ltd.
Union Planters Corp.
United Artists Commun.
United Cos. Financial Corp.
United Financial Group Inc.
United Virginia Bankshares Inc.
University Fed. Savings Bank
Univ. Savings Asso. Sub. Entex Inc.
Unocal Corp.
USF&G Corp.

Type

Notional Principal

DEL
FIX
FIX
FIX
FIX
FIX
FIX
FIX
FIX
FIX
FIX
FIX
DEL
DEL
FLO
FIX

225
15
3.5
7
50
20

22.3
90

21.5
2100
15520
40
75

157.6
FIX
FIX
FIX
DEL
F/F
FLO
FLO
FIX
FIX
FLO
FIX

150
175
5

382.9
20
185
12
100
5

1132
FIX
FIX
FIX
FIX
FIX
FIX
FIX
FLO
FIX
FIX
FIX
F/F
FLO
FIX

150
15

132.3
60
519
539
30

24.1
30
70
20
140
665
50
178
15

FIX
FIX
F/F

1309

FIX
FIX
FIX
FIX

336
39
106
200
80

73

WALL AND PRINGLE/EXPLANATIONS OF INTEREST RATE SWAPS

Firm

Type

Valero Energy Corp.

Washington Mutual Savings Bank
Webb (Del E.) Corp.
Wells Fargo & Co.
West Co. Ine.
Westar Mining Ltd.
Western Capital Investment Corp.
Westinghouse Electric Corp.
Westwood One Inc.

Notional Principal

Firm

Type

Notional Principal

20

Williams Cos. Inc.

Zapata Corp.
Zions Bancorporation

FIX
FIX
FIX

500
50
40

FIX
FLO
FLO
FIX
FIX
FIX
FLO

7.2
60
194
482.5
100

''Notional principal amounts in thousands of dollars.

''Indicates fixed-rate payer,
indicates both fixed and floating-rate payer,
"indicates floating-rate payer.

CALL FOR PAPERS/ABSTRACTS

Research in Real Estate Monograph Series: Volume IV
Essays in Honor of James A. Graaskamp
During his career as an educator, researcher, and practitioner, Jatnes A. Graaskamp made a significant contribution to the
real estate discipline. In recognition of this contribution, the American Real Estate Society (ARES) is publishing a special
volume of the Research in Real Estate monograph series jointly with JAI Press.
The Graaskamp issue will be edited by Jim DeLisle and J. Sa-Aadu. The special issue will be structured around several topical
areas to reflect the interdisciplinary nature of real estate espoused by Dr. Graaskamp. Authors are ecouraged to stibmit
articles which address theoretical or applied research on: real estate appraisal; parket, feasibility, or investment analysis;
urban land economics; project planning or development; financial analysis; corporate real estate or portfolio management;
and contemporary issues (e.g., infrastructure, public/private partnerships, etc.).
Articles in the Graaskamp volume will be subject to a full blind review procedure. The editorial board will ensure that the
articles satisfy the standards of ARES and fit into the specific theme ofthe volume. The editorial board for this special issue
includes Drs. Richard B. Andrews, Teny Grissom, David Hartzell, Austin Jaffee, Norm Miller, Rick Peiser, Jim Shilling, and
Kerry VandeU.
To help ensure a balance of topical coverage, the response to the initial call can be a 23 page abstract or a paper. Depending
on the topic mix of abstracts and papers, a second call for papers may be targeted to specific topics. The foUowing schedule
will be followed:
September 1,1989
January 31,1990
April 30,1990
September 1990

Well-Developed Abstracts/Papers:
Papers Accepted:
Revisions Due:
Tentative Publication:
Submissions should be made in triplicate to:
James R. DeLisle, Vice President
Portfolio Management Research
Prudential Realty Group3rd Floor
Prudential Plaza
Newark, NJ 07101
(201) 802-7408

or

Dr. J. Sa-Aadu
Department of Finance and Real Estate
Graduate School of Business
University of Florida
Gainesville, FL 32611
(904) 392-5844