An interest rate swap (IRS) that entails the exchange of a fixed rate of interest on a certain notional amount for a floating rate of interest on the same notional amount, and in an over the counter (OTC) setting. For example, an interest rate swap entitles an institution to receive 6-month LIBOR rate and pay a fixed rate of 6% per year every six months for a period of 4 years on a notional principal of $200 million.
This kind of swaps (an OTC derivative) is typically used to convert a liability from fixed rate to floating rate or vice versa. It can also be used to convert an investment from fixed rate to floating rate or vice versa.
