Interest rate swap

Interest rate swap,

Definition of Interest rate swap:

  1. The proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding.

  2. 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.

How to use Interest rate swap in a sentence?

  1. Reduced interest rates encourage people to spend money on home improvements.

Meaning of Interest rate swap & Interest rate swap Definition