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).
Since it is now paying a variable rate on its original borrowing and receiving a variable rate under the swap, the firm's effective interest-rate exposure is the swap fixed rate. That is the 'swap rate'.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
![https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg](https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748-320-80.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 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
-
What is an offset mortgage and should you consider one?
Mortgages Offset mortgages are a good way to put your money to work. We explain what they are and if they might work for you.
By Ruth Jackson-Kirby Published
-
Tesla and Alphabet announce results – should you invest in Big Tech?
How profitable are the world’s biggest tech companies? We share the latest so far this earnings season.
By Katie Williams Published