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 ?
On maturity of the futures contracts, a standardized euro-denominated interest-rate swap with the corresponding maturity and a fixed interest rate against a variable six-month Euribor rate will be delivered.
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.
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.
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.
Thus, for example, an interest-rate swap used to hedge another interest-rate swap would not be a hedging transaction (unless the taxpayer is a dealer in swaps).
Interest-Rate Swaps--If you think rates are more likely to rise during your borrowing period, an interest-rate swap to create a "synthetic" fixed rate for your outstanding debt is a good hedging strategy.
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.