

- Trending Categories
Data Structure
Networking
RDBMS
Operating System
Java
iOS
HTML
CSS
Android
Python
C Programming
C++
C#
MongoDB
MySQL
Javascript
PHP
- Selected Reading
- UPSC IAS Exams Notes
- Developer's Best Practices
- Questions and Answers
- Effective Resume Writing
- HR Interview Questions
- Computer Glossary
- Who is Who
What is the concept of interest rate swaps?
Interest rate swap is an agreement between parties to exchange interest rates. Let’s say, we have two parties (first party and second party). Then, the most commonly used interest rate agreement is “first party agrees to pay at fixed interest rate to second party and second party agrees to pay at floating interest rate to first party”. Mostly banks, corporations and investors use interest rate swaps.
Reasons to use
The reasons to use the interest swap rates are explained below −
- Offset risk of floating interest rate.
- To lock the future fixed rate.
- Leverage rate between the currencies.
- To speculate on the predicated fluctuation rates.
Types
The two types of interest swap rates are as follows −
Fixed to floating − Exchange between fixed interest rate for a floating interest rate or exchange between floating interest rate to fixed interest rate.
Float to float − Exchange of floating rates between two benchmarks. For example, one benchmark may be LIBOR and the other may be US prime rate.
Working pattern
Working of the interest swap rates is explained below −
- Notional Principal amount for interest swap is selected.
- Both types of interest and amount of interest to be swapped are defined.
- Signing of interest rate swap agreement is carried out.
Advantages
The advantages of the interest swap rates are listed below −
- Stable payment streams.
- Businesses can maintain additional smaller emergency cash reserves.
- Banks get best interest rates.
- Payers can take future risk (in case).
- Cheaper rates for payers.
Disadvantages
The disadvantages of the interest swap rates are listed below −
- Increase in risk.
- Can upset an overall market.
- Offset risk of their contract.
- Related Questions & Answers
- What is the concept of currency swaps (FX swaps)?
- What is Interest Rate Risk?
- Compare fixed interest rate and floating interest rate
- What are the differences between interest rate and annual percentage rate?
- Write the difference between discount rate and interest rate.
- Differentiate between rate of interest and internal rate of return.
- Explain the concept of machine hour rate depreciation method.
- What is the concept of thread?
- What is the concept of Divestiture?
- What is the concept of hedging?
- How to Compare interest rate and inflation?
- What is the concept of Monolithic kernel?
- What is the concept of Rolling Settlement?
- What is the design space of the Issue Rate?
- What is the employee turnover rate?