Interest Rate Swap

An Interest Rate Swap is an agreement between two investors (known as counterparties) to exchange a stream of fixed rate interest payments for floating rate interest payments.

An investor may want to increase or decrease their exposure to fluctuations in floating interest rates and will contract with the other investor who may be looking to do the opposite.

This type of contract typically comes about when one company can secure a loan at a more advantages fixed interest rate than another company which can, in turn, can secure a loan at a more advantages floating interest rate. These two companies can then exchange cash flows and take advantage of the other's advantage in a win-win contract.