An agreement under which two parties agree to exchange or "swap" a series of payments corresponding to each other's interest payment obligations. See also swap.
+ interest rate swap
USA
A type of over-the-counter derivative (OTC derivative) under which one party, typically called the fixed rate payer, pays a fee (usually monthly or quarterly) to the other party, the floating rate payer, which pays a variable amount based on LIBOR to the fixed rate payer. (Sometimes both parties are floating rate payers where the fee is based on a floating index or other floating rate such as LIBOR.) The payments are usually made by both parties on the same date. Parties use interest rate swaps to lock in their periodic interest-payment amounts in circumstances where they need to fix cash outflow. Consequently, interest rate swaps are often entered into by issuers in securitization transactions, so that market interest rate fluctuations do not adversely impact the ability to make regular principal and interest payments to the holders of the debt securities they have issued.
Related terms
Practical Law Dictionary. Glossary of UK, US and international legal terms. www.practicallaw.com. 2010.