DEFINITION of 'Accreting Principal Swap'

A derivative where counterparties exchange financial instrument benefits, involving a growing notional principal amount. An accreting principal swap, is an interest rate or cross-currency swap where the notional principal grows as it reaches maturity. This type of swap may be used in instances where the borrower anticipates the need to draw down funds over a certain period of time but wants to fix the cost of the funds in advance.

Also called accreting swap, accumulation swap, construction loan swap, drawdown swap and step-up swap.

BREAKING DOWN 'Accreting Principal Swap'

An example of a situation where an accreting principal swap might be sought, is to fix the costs in response to a project's funding requirements. An accreting principal swap is priced by determining the cost of deferring the various trances of the principal along with the legs of the swap itself.

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