Interest rate swap
An interest rate swap is a deal between two investors.
An interest rate swap is a deal between two investors. One has his money in a product paying a fixed rate of interest, such as a government bond; the other in a variable rate instrument that pays out in line with short-term interest rates. To hedge against future interest rate movements, the investors may agree to 'swap' the interest payments they get.
For example, banks tend to have liabilities, such as deposits, that pay out at variable rates, but assets that receive a fixed return. That makes them vulnerable to rising short-term rates and so they may want to shield themselves by swapping their fixed interest for variable income. 'Swaps' are closely watched as an indicator of where markets think interest rates are heading.
See Tim Bennett's video tutorial: Beginner's guide to investing: What is a swap?
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Sign up for MoneyWeek's newsletters
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
-
Why now is the right time to invest in biotech
The biotech sector holds huge potential for investors, with strong growth and attractive valuations. Here's the best way to play it.
-
Zoopla: Busiest home buying May since 2021, but property asking prices slide
Buyers return to the market after the end of higher stamp duty thresholds and post-Easter lulls, but average sales are £16,000 below asking price