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.

See swap.

interest rate swap

see SWAP.
Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005
References in periodicals archive ?
These factors put downward pressure on fixed interest-rate swap rates, narrowing their spread to U.S.
Quirk's essay "How Goldman Sachs Is Swindling Americas Cities" (American Proscenium, July), Professor Quirk evidences profound misunderstanding of what is happening in an interest-rate swap.
in 2008, LCH.Clearnet Group Ltd., owner of the world's largest interest-rate swap clearinghouse, had to manage the risk of the defunct bank's 66,390 rate swaps in five currencies that had tenors as long as 30 years, according to Dan Maguire, head of U.S.
Hedging involves the use of a derivative instrument (e.g., an interest-rate swap) to offset the effect of market changes on a given asset, liability, or future cash flow (e.g., the anticipated future purchase of commodities).
Trading on the Swedish interest-rate swap market averaged daily about \$12 billion during April 2007 according to the Bank for International Settlements.
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.
Singleton, 1997, "An Econometric Model of the Term Structure of Interest-Rate Swap Yields." Journal of Finance, 52, 1287-1321.
2002-71 addressed a situation in which an interest-rate swap hedged only a portion of the debt instrument's entire term.
Like most engineers, Rice, when asked to define derivatives in general and the basic concept of a fixed-to-floating interest-rate swap in particular, literally draws a picture of the transaction on a napkin--his engineering background coming into play, he says.
And the authoritative accounting rules are virtually silent on the multitudes of financial instruments, such as interest-rate swaps, that companies use to create "synthetic instruments." For example, a company needing fixed-rate financing may choose to issue variable-rate debt converted to a fixed-rate exposure by executing an interest-rate swap, which requires the company to make periodic fixed payments and receive periodic floating rate-based payments.

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