By Nathaniel Luce
Publication: THE WALL STREET JOURNAL
An interest-rate swap is supposed to help local governments, schools, museums and hospitals lower borrowing costs. More recently, the turmoil in the auction-rate securities market has caused the use of certain swaps to backfire, forcing issuers to pay much higher rates. ROBERT WHALEY, a finance professor at the Owen Graduate School of Management at Vanderbilt University, said municipalities should generally avoid swaps and issue most debt with a simple a fixed rate. While it is possible that the fixed rate might bring in some additional costs as interest rates fall, it eliminates uncertainty about debt payments. “That’s a safe management strategy,” he said. “You lock in your rates so you can focus on the business plan.”
