# 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.

Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

## 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.

Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

## interest rate swap

See swap.

Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.

## interest rate swap

see SWAP.Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005

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