Concept of Interest Rate Swap

The concept of interest rate swap deals with the exchange of future payments of interest. As per the concept of interest rate swap the parties who take part in the exchange are called the counterparties. The interest rate swaps are exchanged on the basis of a principal amount that is fixed.
In an interest rate swap a fixed interest payment is often substituted with a floating interest payment. This floating interest payment is associated with a rate of interest. Most often the interest rate is LIBOR. Interest rate swaps have also been defined as the switching of a group of cash flows with another group of group of cash flows by several counterparties.

The interest rate swaps are normally bought and sold in over-the-counter markets. Thus they are often thought of as business agreements that have been finalized by two or more than two parties.

The interest rate swaps could be made in any way to suit the necessities of the counterparties involved in the agreement. The business enterprises often want to acquire a rate of interest structure from another company, which is providing it at cheaper rate.
It is mainly in this context that the former type of companies wants to use an interest rate swap.

Utility of Interest Rate Swap
The present day business entities employ the interest rate swap in order to restrict the level to which it might get exposed to the irregular changes in rates of interest. The interest rate swap could also be used to gain a rate of interest that is slightly lower than what the business entities might have obtained if they had not used the interest rate swap.

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Last Updated on : 1st July 2013

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