(Answered) Question - assume that instead of initially signing a

Accounting

Question - Assume that instead of initially signing a variable-rate loan, Cam receives a fixed rate of 8 percent on the loan on January 1, 2011. Instead of entering into a pay-fixed, receive-variable interest rate swap with Gra, Cam enters into a pay-variable, receive-fixed interest rate swap. The variable portion of the swap formula is LIBOR rate +2percent,+2 percent, determined at the end of the year to set the rate for the following year. The first year that the swap will be in effect is for interest payments in 2012.

Assume that the LIBOR rate on December 31, 2011, is 7 percent.

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

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