Uses of Interest Rate Swap

There are several uses of interest rate swaps. Nowadays a number of entities, both business and non-business, are using the interest rate swaps. There are many reasons for using the interest rate swaps and they are advantageous in many ways as well.

Interest rate swaps could also help to bring down the expenses of funding. Interest rate swaps can prove to be useful with regard to management of liabilities. Various business entities have been able to assume a notional perspective with regard to rates of interest over a shorter period of time.

Interest Rate Swap Users
The main users of interest rate swaps are:
Commercial Banks
Vehicles of Investment
Investment Banks
Investment Trusts
Non-Financial Operating Business Entities
Governmental Bodies
Insurance Firms
States
Mortgage Firms
Reasons for Using Interest Rate Swaps

There are causes for which the interest rate swaps are used. They may be enumerated as below:
For getting funding at lesser costs
For applying the total asset management plans
For covering the interest rate against any kind of risk
For carrying out the liability management schemes
For procuring assets for investment that provide higher amount of returns
For speculating about the expected fluctuations of rates of interest
For forming kinds of assets for investment that are not to be found in any other way

Advantages of Using Interest Rate Swaps
There are many benefits of using interest rate swaps. The primary benefits associated with the use of interest rate swaps are:
The interest rate swaps function as financial devices. In this capacity they are supposed to help the issuers in bringing down the volume of debt service.
A floating-to-fixed interest rate swap enhances the certainty associated with the dues to be paid in future by an issuer.
Swapping of rate of interest helps the issuers to revise their debt profiles. As a result, they can take advantage of the situations in the market that are expected to prevail or are already there.
Swapping from fixed-to-floating rate helps the issuer in saving money when the rates of interest go down.

 

More Information Related to Finance Theory
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Systemic Risk Currency Risk Market Risk
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Gordon Model Monte Carlo Option Model Ho Lee Model
Rendleman Bartter Model Vasicek Model Hull White Model
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Last Updated on : 1st July 2013

 

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