interest rate swap

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Interest rate swap

A binding agreement between counterparties to exchange periodic interest payments on some predetermined dollar principal, which is called the notional principal amount. For example, one party will pay fixed and receive variable.

Interest Rate Swap

The exchange of interest rates for the mutual benefit of the exchangers. The exchangers take advantage of interest rates that are only available, for whatever reason, to the other exchanger by swapping them. The two legs of the swap are a fixed interest rate, say 3.5%, and a floating interest rate, say LIBOR + 0.5%. In such a swap, the only things traded are the two interest rates, which are calculated over a notional value. Each party pays the other at set intervals over the life of the swap. For example, one party may agree to pay the other a 3.5% interest rate calculated over a notional value of $1 million, while the second party may agree to pay LIBOR + 0.5% over the same notional value. It is important to note that the notional amount is arbitrary and is not actually traded. This is also called a plain vanilla swap.

interest rate swap

See swap.

interest rate swap

see SWAP.
References in periodicals archive ?
The Financial Services Authority (FSA) said Santander UK, Allied Irish Bank, Bank of Ireland, the Co-operative Bank and Clydesdale and Yorkshire banks had agreed to adopt the same approach being used by the UK's biggest banks in offering redress to firms mis-sold interest-rate swaps.
I applaud Erie School District Superintendent Jim Barker and the school board for their decision to get out of this risky financial agreement and I recommend that other school districts follow this action because interest-rate swaps have no place in local government," Wagner said.
9 billion in public debt tied to interest-rate swaps.
The product, called the NASDAQ OMX Interest Rate Swap (NOIS), is a futures contract for interest-rate swaps that makes it possible to obtain exposure to the SEK swap curve.
Trading on the Swedish interest-rate swap market averaged daily about $12 billion during April 2007 according to the Bank for International Settlements.
A report on LDI released earlier this year by Russell Investments suggests that the fall-out from the problems experienced by complex mortgage securities might scare plan sponsors away from employing LDI strategies involving derivatives, such as interest-rate swaps.
One common way to do that is to put on an interest-rate swap that lengthens the duration of the plan's assets to bring it closer to the duration of the liabilities.
Many taxpayers enter into interest-rate swaps to hedge debt instruments.
Rice Financial carves out a profitable niche in the municipal interest-rate swaps market
While no promulgated guidance for interest-rate swaps and other derivatives exists, generally accepted practices have emerged.
Fitch believes the use of floating-rate debt by hospitals and health care systems will continue to grow over the long term as a result of more sophisticated asset/liability strategies and the growing acceptance of and comfort with interest-rate swaps by health care management and boards.
Interest-Rate Sensitivity--The three middle options on the chart come from the evolving market of modern hedging techniques, in which interest-rate swaps and caps are very popular.