Interest rate swap.. Easy Definition.. #ChartAcc

Friday, January 17, 2014

ChartAcc.com - An interest rate swap is:
  • An agreement in between 2 parties 
  • to make interest payments to each other 
  • for a set period 
  • based upon a notional principal (Used for calculation only, no risk is attached to it.)

Net of payments are exchanged on a fixed interest rate for payments based on a floating rate, often LIBOR.

The fixed rate is known as the swap rate. 

Example:
Party A pays a fixed rate to to party B and receives a variable rate in exchange from party B. 

Uses:
  • to hedge against interest rate exposure, 
  • to speculate on future interest rate movements
  • to obtain a higher yield on assets.

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