An Interest Rate Guarantee (IRG) is:

• A. An option on a FRA agreed between two parties; holder has option to takeout an FRA for an upfront premium
• B. An exchange-traded contract that pays the difference if rates rise
• C. A fixed-rate loan contract
• D. A sinking fund for debt repayment

Answer: (A)

The key idea is that an Interest Rate Guarantee is a right to enter into an FRA (a forward-rate agreement) in the future, for a price paid upfront. It’s essentially an option on an FRA: you pay a premium now for the ability to take out an FRA later if the circumstances are favorable. If rates move in a way that makes taking out the FRA worthwhile, you exercise the option; if not, you let it lapse and you’ve lost only the premium.

This is different from a fixed-rate loan (which is a loan with a set rate you must repay) and from a sinking fund (a pool of funds set aside for debt repayment). It’s also not an exchange-traded instrument that simply pays the difference if rates rise—that describes a standard futures or similar contract, not this bilateral option on an FRA.