The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results.

An interest rate swap is an agreement to exchange interest payments from a financial instrument for interest payments from another financial instrument.

Interest rate swap definition

An interest rate swap is an agreement to exchange interest payments from a financial instrument for interest payments from another financial instrument.

This usually involves trading future interest payments from an instrument with a fixed interest rate for one with a floating or variable rate, or vice-versa. This is usually undertaken to increase or decrease your exposure to changes in interests rates, or possibly to secure a lower interest rate than would otherwise be available. However, interest rate swaps can involve swapping one floating rate for another. This is known as a ‘basis swap’.

Ultimately, interest rate swaps come down to two or more parties agreeing to swap one set of cash flows for another. A company may only be able to secure a loan at a floating rate, for example, but would prefer to be exposed to a fixed rate, and therefore look to swap interest rates with another party.

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