Interest Rate Swap

Sam · Posted: Wed Apr 07, 2004 4:07 am Post subject: Interest Rate Swap

Interest Rate Swap refers to an agreement between two parties that allows them to exchange interest payments over a period of time depending upon specific terms and conditions. In a rate swap, one party agrees to pay a fixed interest rate in return of getting an adjustable rate from another party. Usually the adjustable rate in the swap is linked to the LIBOR Index.

Interest rate swaps are used to limit the fluctuations in rates. It helps to obtain lower interest rates which are otherwise not possible. The fixed portion of the swap has a rate that is determined by its particular market. This is the rate at which the swap occurs for one of the parties signing the agreement.

The parties in a rate swap do not exchange the principal amount. Often on the payment date, only the difference between the two payment amounts is offered to the party who is entitled to receive it and there may not be any exchange regarding the total interest amounts.

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