Extendable Swap

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DEFINITION of 'Extendable Swap'

An exchange of cash flows between two counterparties, one of whom pays interest at a fixed rate and one of whom pays interest at a floating rate, in which the fixed-rate payer has the right to lengthen the term of the arrangement. The fixed-rate payer might want to exercise its right to extend the swap if interest rates were rising because it would profit from continuing to pay a fixed, below-market rate of interest and receiving an increasing market rate of interest from the floating rate.

INVESTOPEDIA EXPLAINS 'Extendable Swap'

The additional feature of an extendable swap makes it more expensive than a plain vanilla interest rate swap. That is, the fixed rate payer will pay a higher fixed interest rate and possibly an extension fee. The opposite of an extendable swap is a cancelable swap, which gives one counterparty the right to terminate the agreement early.

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  1. What is an absolute rate?

    An absolute rate is easy to understand once you know the basics of an interest rate swap. An absolute rate is the fixed rate ... Read Full Answer >>
  2. How do I use a rollercoaster swap?

    A rollercoaster swap is the name for a swap (the exchange of one security for another) with a notional principal that differs ... Read Full Answer >>
  3. What is a "gypsy swap"?

    A gypsy swap is a unique method by which a company may raise capital without issuing debt or holding a secondary offering. ... Read Full Answer >>
  4. How can I use an "airbag swap"?

    An airbag swap is an interest rate swap designed to provide a cushion against rising interest rates. The airbag swap originally ... Read Full Answer >>
  5. 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 >>
  6. 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 >>
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