interest rate swap


An exchange of interest payments on a specific principal amount. This is a counterparty agreement, and so can be standardized to the requirements of the parties involved. An interest rate swap usually involves just two parties, but occasionally involves more. Often, an interest rate swap involves exchanging a fixed amount per payment period for a payment that is not fixed (the floating side of the swap would usually be linked to another interest rate, often the LIBOR). In an interest rate swap, the principal amount is never exchanged, it is just a notional principal amount.
Also, on a payment date, it is normally the case that only the difference between the two payment amounts is turned over to the party that is entitled to it, as opposed to exchanging the full interest amounts. Thus, an interest rate swap usually involves very little cash outlay.

Use interest rate swap in a sentence

You may want to try and take on an interest rate swap if you think that will save you some money.

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There was an interest rate swap and I wondered what the amount was and how everything would work out for us.

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The interest rate swap used the LIBOR rate to set the mutually beneficial interest rate for each party involved in the deal.

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