Swap rate

A company has an existing ten-year loan from a bank on which it pays a floating rate of interest...

A company has an existing ten-year loan from a bank on which it pays a floating rate of interest (linked to an interbank lending rate, such as, say, Libor). It is now worried that interest rates will rise but does not want the hassle and expense of cancelling the loan.

So instead it enters into a separate swap agreement with another bank. It agrees to pay a fixed rate of interest to that bank over the same term as the original loan and on the same 'notional' amount of borrowing (notional because the swap does not involve a new loan). It receives a floating rate in return (also linked to Libor).

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free
https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

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
MoneyWeek

MoneyWeek is written by a team of experienced and award-winning journalists, plus expert columnists. As well as daily digital news and features, MoneyWeek also publishes a weekly magazine, covering investing and personal finance. From share tips, pensions, gold to practical investment tips - we provide a round-up to help you make money and keep it.