A derivative that involves the exchange of a fixed rate of interest on a certain notional amount for a floating rate of interest on the same notional amount. 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 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.
November 16, 2023