Amortizing Swap

AAA

DEFINITION of 'Amortizing Swap'

An exchange of cash flows, one of which pays a fixed rate of interest and one of which pays a floating rate of interest, and both of which are based on a notional principal amount that decreases. In an amortizing swap, the notional principal decreases periodically because it is tied to an underlying financial instrument with a declining (amortizing) principal balance, such as a mortgage.

INVESTOPEDIA EXPLAINS 'Amortizing Swap'

The notional principal in an amortizing swap may decline at the same rate as the underlying or at a different rate which is based on the market interest rate of a benchmark like mortgage interest rates or the London Interbank Offered Rate. The opposite of an amortizing swap is an accreting principal swap - its notional principal increases over the life of the swap. In most swaps, the amount of notional principal remains the same over the life of the swap.

RELATED TERMS
  1. Reverse Swap

    An exchange of cash flow streams that undoes the effects of an ...
  2. Debt For Bond Swap

    A debt swap involving the exchange of a new bond issue for similar ...
  3. Interest Rate Swap

    An agreement between two parties (known as counterparties) where ...
  4. Forward Swap

    A swap agreement created through the synthesis of two swaps differing ...
  5. Credit Default Swap - CDS

    A swap designed to transfer the credit exposure of fixed income ...
  6. Currency Swap

    A swap that involves the exchange of principal and interest in ...
RELATED FAQS
  1. What is the difference between amortization and depreciation?

    Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally ... Read Full Answer >>
  2. What are the main risks associated with trading derivatives?

    The primary risks associated with trading derivatives are market, counterparty, liquidity and interconnection risks. Derivatives ... Read Full Answer >>
  3. Should you calculate Value at Risk (VaR) for counterparty credit risk?

    Value at risk (VaR) calculations may be helpful for risk management when trading credit default swaps and other derivatives ... Read Full Answer >>
  4. For what financial instruments is a modified duration relevant?

    The modified duration is a formula used to calculate the percent change in the price of a financial instrument when there ... Read Full Answer >>
  5. What is the difference between derivatives and swaps?

    Derivatives are securities with prices dependent on one or multiple underlying assets. Common derivatives include forward ... Read Full Answer >>
  6. Why is tenor important on credit default swaps?

    Tenor – the amount of time left on a debt security's maturity – is important in a credit default swap because it coordinates ... Read Full Answer >>
Related Articles
  1. Options & Futures

    An Introduction To Structured Products

    Learn a simple way to bring the benefits of derivatives into your portfolio.
  2. Investing Basics

    The Barnyard Basics Of Derivatives

    This tale of a fictional chicken farm is a great way to learn how derivatives work in the market.
  3. Bonds & Fixed Income

    A Guide To Real Estate Derivatives

    These instruments provide exposure to the real estate market without having to buy and sell property.
  4. Options & Futures

    Are Derivatives Safe For Retail Investors?

    These vehicles have gotten a bad rap in the press. Find out whether they deserve it.
  5. Options & Futures

    An Introduction To Swaps

    Learn how these derivatives work and how companies can benefit from them.
  6. Bonds & Fixed Income

    The Advantages Of Bond Swapping

    This technique can add diversity to your portfolio and lower your taxes. Find out how.
  7. Active Trading

    How Companies Use Derivatives To Hedge Risk

    Derivatives can reduce the risks associated with changes in foreign exchange rates, interest rates and commodity prices.
  8. Investing Basics

    Understanding Total Return Swaps

    A total return swap is a contract in which a payer and receiver exchange the credit risk and market risk of an underlying asset.
  9. Investing

    4 Structured Product Types Wealthy Clients Love

    High-net-worth investors find structured products appealing for a variety of reasons. Here's a look at four types.
  10. Investing Basics

    Explaining Currency Swaps

    A swap that involves the exchange of principal and interest in one currency for the same in another currency.

You May Also Like

Hot Definitions
  1. Dog And Pony Show

    A colloquial term that generally refers to a presentation or seminar to market new products or services to potential buyers.
  2. Topless Meeting

    A meeting in which participants are not allowed to use laptops. A topless meeting organizer can also ban the use of smartphones, ...
  3. Hedging Transaction

    A type of transaction that limits investment risk with the use of derivatives, such as options and futures contracts. Hedging ...
  4. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  5. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  6. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!