interest rate swap
Definition
Contractual agreement under which two parties exchange interest payments of differing nature on an imaginary amount of principal (called notional principal) for a certain period. Actually, it is an exchange of different cash flows; one generated by a fixed interest rate on a sum, the other by a floating interest rate on the same sum. For example, a party (such as a depository institute) that earns a steady stream of income may prefer one which matches (fluctuates with) the market interest rates. It may agree to exchange its interest income on a certain sum (say ten million dollars of principal) for a certain period (say one year) with another party (such as a mutual fund) which earns a fluctuating interest income but prefers a steady one. Such swaps are considered derivatives because the underlying asset (the notional principle) is not exchanged in the transaction.
interest rate swap is in the Banking, Commerce & Finance, Disaster Planning & Risk Management and Investing subjects.
interest rate swap appears in the definitions of the following terms: swap, swaption and notional principal
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