Extendable Swap

AAA

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.

RELATED TERMS
  1. Reverse Swap

    An exchange of cash flow streams that undoes the effects of an ...
  2. Debt For Bond Swap

    A debt swap involving the exchange of a new bond issue for similar ...
  3. Interest Rate Swap

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

    A swap agreement created through the synthesis of two swaps differing ...
  5. Currency Swap

    A swap that involves the exchange of principal and interest in ...
  6. Quanto Swap

    A swap with varying combinations of interest rate, currency and ...
Related Articles
  1. Investing Basics

    The Barnyard Basics Of Derivatives

    This tale of a fictional chicken farm is a great way to learn how derivatives work in the market.
  2. Options & Futures

    An Introduction To Swaps

    Learn how these derivatives work and how companies can benefit from them.
  3. Investing

    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 portion of an interest rate swap. Interest rate swap is an agreement ...
  4. Investing

    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 during various payment periods. In other words, it is a swap agreement ...
  5. Investing

    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. In many respects, a gypsy swap is similar to a rights offering, except ...
  6. Investing

    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 was designed for insurance companies because their balance sheets ...
  7. Forex

    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 principal amount. However, in an interest rate swap, the principal amount ...
  8. Investing Basics

    The Strange New World Of The Bitcoin Exchange Futures Market

    We explain the basics of the Bitcoin exchange and futures market.
  9. Options & Futures

    Is short selling ethical?

    Understand the concept and practice of short selling, and examine the ethical questions that some investors raise in regard to this practice.
  10. Options & Futures

    How is it possible to trade on a stock you don't own, as is done in short selling?

    Understand how the process of short selling allows a person to sell a stock he or she doesn't technically own by borrowing on margin from a broker.

You May Also Like

Hot Definitions
  1. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  2. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  3. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  4. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  5. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
  6. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
Trading Center