Interest Rate Swap

An interest rate swap is when two parties exchange future interest payments. Such a swap will usually involve exchanging a fixed interest rate for a floating rate, or vice versa, and one reason for doing this may be that a company can borrow money easily on one rate type, but will find that their cash-flow may be better paying interest on a different rate type. This type of arrangement may also suit one company who wants to limit future risks by knowing what their fixed rate payment will be, while another may be happy to accept the risk that a variable interest rate brings. Every company will have their own priorities and constraints, and for an interest rate swap to be suitable and work well, it must be an arrangement that meets the needs of both parties.

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