Interest Rate Swap

Interest rate swap is an agreement between two parties where the two parties decides to exchange interest obligations or receipts for an agreed period of time. Under interest rate swap there is no exchange of principal, it involves only exchange of interest between two parties.

Interest rate swap is dependent on an agreed notional principal amount and is usually transacted on a fixed for floating rate basis. So for example if the borrower of a loan is worried about the rising interest rates than he or she will enter into swap agreement with other party who is willing to take that risk, that borrower will pay only predetermined rate and if interest rate rises other party will have to pay the difference of interest rate.

So if a person has taken floating rate loan at 10 percent interest rate and the interest rate rises to 12 percent then other party will pay the 2 percent difference and borrower will be at advantage in this case. However if the interest rate goes to 8 percent then the borrower will pay difference of 2 percent to other party with which the agreement of interest rate swap was entered. As one can see that interest rate swap allows you to manage interest rate risk arising out of the borrowing, however it has the risk that since this kind of swap are over the counter product, there are chances that counter party may not fulfill its contractual obligations as set out in interest rate swap.

0 comments… add one

Leave a Comment


Related pages


what is a major disadvantage of a centrally planned economyobjectives of demat accountnon convertible preference shareswhat are the advantages and disadvantages of specializationprovision for salary journal entrywhat are characteristics of a command economydisadvantages of job costingdisadvantages of traditional bankingslr & crrunearned rent adjusting entrysimilarities between socialism and capitalismexample of cash inflowdisadvantages of functional organisationthe disadvantages of globalizationdefine certificate of depositsdisadvantages of economic globalizationadvantages of fifo methodsocialism advantages and disadvantagesdisadvantages of a command economymixed economy of welfaresocialist economy disadvantagesdirect quote vs indirect quotewhat is the difference between a wholesaler and a retailerdividend wikidisadvantages of decentralizationdurable goods definition economicsmeaning of demand loanexample of diminishing marginal utilityficitiousbenefits of ppfconsignee meaning in englishmarket skimming pricing strategy examplesaccounting treatment for contingent liabilitiesbank overdraft advantages and disadvantagesmarginal costing advantagesunearned revenue in balance sheetadvantages and disadvantages of command economyillegal immigration disadvantagesadvantage and disadvantage of traditional economyadvantages and disadvantages of oligopolyautocratic leadershipnegatives of international tradedevalutiondisadvantages of organisational structureeffect of advertisement on monopolistic competitionoligopoly market examples in indiamortgage hypothecationmix of capitalism and socialismwhat is trial balance in hindicost oriented pricing methodsdefinition of a planned economydividend policies of companiesmeaning of pros and cons in hindidifference between creditor and debtordefinition of substitute goods in economicsdirect quotation and indirect quotationwhat are the disadvantages of globalizationexample of congeneric mergerwhat is a floating currencydefinition consignorhow to fill out a checking withdrawal slipdifference between debit card and credit card wikiobjectives of demat accountebit financeassumptions of the law of diminishing marginal utilityecs in bankingdefine junk bondmixed economy definition economicshypothecation and mortgage differencebank loan and bank overdraftdisadvantage of fifowhat are the advantages of socialismsocialism advantages and disadvantagesfeatures of monopolistic competition in economicsexample of explicit costnon cumulative preference sharedifference between cash credit and overdraftprepaid insurance entry