Interest-rate smoothing
Interest-rate smoothing combines fixed- and floating-rate borrowing or investments so that a rate movement affects only part of the relevant exposure immediately. If rates rise, fixed-rate borrowing can cushion the increased cash cost on floating debt; if rates fall, the fixed portion limits the benefit from lower floating rates. The outcome depends on amounts, maturities, reset dates and costs. This approach reduces some sensitivity but does not fix the total rate or eliminate refinancing and credit risk. It is distinct from accounting earnings smoothing.
Worked example
A company owes $1 million at a fixed rate and $1 million at a floating rate. A one-percentage-point rise in the floating reference adds about $10,000 annual interest before other effects; borrowing the full $2 million at the same floating rate would add about $20,000.
Common mistake
Claiming a fixed/floating mix guarantees the lowest available cost or eliminates all interest-rate and refinancing risk.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Supporting | September 2026–June 2027 |
| ACCA | FM | Direct | September 2026–June 2027 |