A method for settling a swap unwind, whereby the party with the profit receives from the party with a loss a series of periodic payments (annuity) over the remaining life of the swap, rather than a lump sum amount. This may be the case when the receiving party doesn’t have an immediate need for the cash settlement. Therefore, the cash will be left with the counterparty who undertakes to pay it back in an annuity stream.

Opting for this type of payment, the party with a profit must have in mind interest rate expectations, i.e., the expected movement of interest rates in the future. If a party to a swap expects rates to fall, and as such, wishes to be in a floating mode, so he unwinds the swap, and consequently his position as a fixed-rate payer. After a year, if that party thinks that rates have bottomed out, he may take the remaining amount in lump sum in order to maximize what he receives (in terms of present value techniques, the lower the rate, and therefore the discount rate, the higher the payment will be).