Interest Rate Swap

Interest Rate Swap - Overview

An interest rate swap is a contractual agreement to exchange periodic interest payments. In most cases one of the rates is fixed and the other is a variable rate whose performance is matched against the prime rate. Interest rate swaps are normally longer in their terms, generally for a period of one year or more. The reference rate for interest rate swaps is LIBOR. The swap itself is a purely speculative arrangement although on day one the value of the fixed flows equals the value of the floating payments, so the risk is initially zero. An interest rate swap is viewed as low risk, but the risk begins to emerge as the floating rate adjusts over the term.

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