Arrears Swap

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.

Investopedia explains '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.



comments powered by Disqus
Hot Definitions
  1. Leveraged Benefits

    The use – by a business owner or professional practitioner – of their company’s receivables or current income to secure a loan whose proceeds then indirectly fund a retirement plan.
  2. Direct Consolidation Loan

    A loan that combines two or more federal education loans into a single loan. A Direct Consolidation Loan allows the borrower to make a single monthly payment. The loan is facilitated by the U.S. Department of Education and does not require borrowers to pay an application fee.
  3. Through Fund

    A type of target-date retirement fund whose asset allocation includes higher risk and potentially higher return investments "through" the fund's target date and beyond.
  4. Last In, First Out - LIFO

    An asset-management and valuation method that assumes that assets produced or acquired last are the ones that are used, sold or disposed of first.
  5. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version of success in a society where upward mobility is possible for everyone. The American dream is achieved through sacrifice, risk-taking and hard work, not by chance.
  6. Texas Ratio

    A ratio developed by Gerald Cassidy and other analysts at RDC Capital Markets to measure the credit problems of particular banks or regions of banks. The Texas ratio takes the amount of a bank's non-performing assets and loans, as well as loans delinquent for more than 90 days, and divides this number by the firm's tangible capital equity plus its loan loss reserve.
Trading Center