The way a borrower can most easily raise money isn't always best suited to their needs. Imagine two firms need to raise money. Company A might easily be able to raise fixed-interest money, but what it really needs are floating rate funds. The reverse is true for Company B. The solution for them would be an interest rate swap.
Company A issues its fixed-interest bond and Company B issues a floating-rate loan. They then agree to swap their interest payment liabilities, and so pay one another's interest and end up getting the money in the form they need it at a cheaper rate than if they had borrowed it direct.
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
Watch Tim Bennett's video tutorial: Beginner's guide to investing: What is a swap?
-
More pensioners dragged into 60% tax trap – could you be caught?Frozen thresholds are pushing more older workers into paying income tax at levels much higher than the headline rate, new figures show. We look at why and how you can avoid being caught in the 60% tax trap.
-
Higher earners face £377 bill if Reeves puts up income tax – do you fit the Treasury’s definition of ‘working people’?Labour’s election manifesto pledged not to raise National Insurance, VAT or income tax but prime minister Keir Starmer appeared reluctant to repeat the promise this week
