An interest rate swap which involves the exchange of fixed rate payments for “capped” floating rate payments. The floating rate payer may need to limit possible floating rate payments by putting a cap or ceiling on the floating rate he has to pay. However, an up-front fee or premium has to be paid by the floating rate payer willing to “cap his swap” to the fixed rate payer.

The rate-capped swap is also known simply as a capped swap.