Basis Rate Swap


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.

BREAKING DOWN '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.

  1. Swap

    A derivative contract through which two parties exchange financial ...
  2. LIBOR

    LIBOR or ICE LIBOR (previously BBA LIBOR) is a benchmark rate ...
  3. Interest Rate Swap

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

    1. The variation between the spot price of a deliverable commodity ...
  5. Interest Rate

    The amount charged, expressed as a percentage of principal, by ...
  6. Treasury Bill - T-Bill

    A short-term debt obligation backed by the U.S. government with ...
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