Basis Rate Swap

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DEFINITION of 'Basis Rate Swap'

A type of swap in which two parties swap variable interest rates based on different money markets. This is usually done to limit interest-rate risk that a company faces as a result of having differing lending and borrowing rates.

INVESTOPEDIA EXPLAINS 'Basis Rate Swap'

For example, a company lends money to individuals at a variable rate that is tied to the London Interbank Offer (LIBOR) rate but they borrow money based on the Treasury Bill rate. This difference between the borrowing and lending rates (the spread) leads to interest-rate risk. By entering into a basis rate swap, where they exchange the T-Bill rate for the LIBOR rate, they eliminate this interest-rate risk.

RELATED TERMS
  1. LIBOR

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  2. Interest Rate Swap

    An agreement between two parties (known as counterparties) where ...
  3. Interest Rate

    The amount charged, expressed as a percentage of principal, by ...
  4. Interest Rate Risk

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  5. Treasury Bill - T-Bill

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  6. Swap

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RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. Other than my savings account, what other types of holdings compound my interest?

    Investors and savers can use the power of compounding interest to accumulate wealth over time. Unlike simple interest that ... Read Full Answer >>
  4. Which asset classes are the most risky?

    Equities is the riskiest class of assets. Dividends aside, they offer no guarantees, and investors' money is subject to the ... Read Full Answer >>
  5. What are interest rate swaps on the OTC market?

    Interest rate swaps are agreements where counter parties agree to exchange interest rate cash flows based upon the difference ... Read Full Answer >>
  6. What are the Securities and Exchange Commission regulations regarding swaps?

    The U.S. Securities and Exchange Commission (SEC) was granted the authority to regulate security-based swaps (SBS) by Title ... Read Full Answer >>
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