Arrears Swap

AAA

DEFINITION of 'Arrears Swap'

An interest rate swap in which the floating payment is based on the interest rate at the end of the period. The payment is made at the end of the period, eliminating the time lag between setting the amount and paying it.

BREAKING DOWN 'Arrears Swap'

This type of swap is often used by speculators who attempt to predict the yield curve. It is better suited for speculating than a normal interest rate swap, since it allows speculators to receive payments that reflect the timeliness of their predictions.

For example, let's say speculators believe the current yield curve is too flat. They can purchase an arrears swap, which will pay them a floating payment each period. The fixed payment will be set to reflect the current market yield. If the speculators are correct and the yield curve steepens, they will receive a higher floating payment, while still making a relatively lower fixed payment.

RELATED TERMS
  1. Arrears

    Overdue debt, liability or obligation. An account is said to ...
  2. Speculator

    A person who trades derivatives, commodities, bonds, equities ...
  3. Interest Rate Swap

    An agreement between two parties (known as counterparties) where ...
  4. Yield Curve

    A line that plots the interest rates, at a set point in time, ...
  5. Fixed-For-Floating Swap

    An advantageous arrangement between two parties (counterparties), ...
  6. Swap

    Traditionally, the exchange of one security for another to change ...
Related Articles
  1. Options & Futures

    An Introduction To Swaps

    Learn how these derivatives work and how companies can benefit from them.
  2. 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.
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Investing Basics

    Explaining Forward Rate Agreements

    Forward rate agreement (FRA) refers to an interest rate or foreign exchange hedging strategy.
  6. Options & Futures

    An Introduction To Value at Risk (VAR)

    Volatility is not the only way to measure risk. Learn about the "new science of risk management".
  7. Mutual Funds & ETFs

    ETF Analysis: United States Natural Gas Fund LP

    Find out more about the United States Natural Gas exchange-traded fund, the characteristics of the ETF and the suitability and recommendations of it.
  8. Mutual Funds & ETFs

    ETF Analysis: United States Oil Fund

    Find out more about the United States Oil Fund, the characteristics of USO, and the suitability and recommendations of the ETF for investors.
  9. Investing

    Why High Yield Still Has A Role To Play

    An asset class of this bull market has been high yield debt, as many searching for income in a low-rate world have turned to these higher-yielding bonds.
  10. Mutual Funds & ETFs

    3 Fixed Income ETFs in the Gold Sector

    Find out more about the top ETFs that track the gold sector, such as the SPDR Gold Shares ETF, the PowerShares DB Gold ETF and the iShares Gold Trust ETF.
RELATED FAQS
  1. What is a debt/equity swap?

    Occasionally, a company will need to undergo some financial restructuring to better position itself for long term success. ... Read Full Answer >>
  2. How do companies benefit from interest rate and currency swaps?

    An interest rate swap involves the exchange of cash flows between two parties based on interest payments for a particular ... Read Full Answer >>
  3. How do futures contracts roll over?

    Traders roll over futures contracts to switch from the front month contract that is close to expiration to another contract ... Read Full Answer >>
  4. Why do companies enter into futures contracts?

    Different types of companies may enter into futures contracts for different purposes. The most common reason is to hedge ... Read Full Answer >>
  5. What does a futures contract cost?

    The value of a futures contract is derived from the cash value of the underlying asset. While a futures contract may have ... Read Full Answer >>
  6. 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 >>

You May Also Like

Hot Definitions
  1. Bear Market

    A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment ...
  2. Alligator Spread

    An unprofitable spread that occurs as a result of large commissions charged on the transaction, regardless of favorable market ...
  3. Tiger Cub Economies

    The four Southeast Asian economies of Indonesia, Malaysia, the Philippines and Thailand. Tiger cub economy indicates that ...
  4. Gorilla

    A company that dominates an industry without having a complete monopoly. A gorilla firm has large control of the pricing ...
  5. Elephants

    Slang for large institutions that have the funds to make high volumes trades. Due to the large volumes of stock that elephants ...
  6. Widow's Exemption

    In general terms, a widow's exemption refers to the amount that can be deducted from taxable income by a widow, thereby reducing ...
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!