Interest rate swaps: financial tool of the '90s - includes related article

Healthcare Financial Management, Nov, 1993 by Mark A. Woodard

A similar analysis indicates that Hospital A could issue the 1993 bonds as variable rate bonds that are swapped to a fixed rate: using the historic coverage criterion, the worst case could still be managed comfortably in the event of a counterparty default. Hospital B, on the other hand, would have a false sense of security if it issued the 1993 bonds in a variable rate mode with a swap to a fixed rate for two reasons: the 1990 bonds have a low present interest expense but higher risk, and the 1993 bonds have a put risk that has not been hedged, and there is the possibility of counterparty default on the 1993 bonds, which would result in even more interest rate exposure.

Mark A. Woodard is vice president of Municipal Bond Investors Assurance Corporation, a bond insurance firm in Armonk, N.Y.