Amortizing Swap

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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.

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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 >>
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    Swaps are derivative contracts between two parties that involve the exchange of cash flows. Interest rate swaps involve exchanging ... Read Full Answer >>
  3. When was the first swap agreement and why were swaps created?

    Swap agreements originated from agreements created in Great Britain in the 1970s to circumvent foreign exchange controls ... Read Full Answer >>
  4. How are swap agreements financed?

    Since swap agreements involve the exchange of future cash flows and are initially set at zero, there is no real financing ... Read Full Answer >>
  5. What are the risks involved with swaps?

    The main risks associated with interest rate swaps, which are the most common type of swap, are interest rate risk and counterparty ... Read Full Answer >>
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