Fixed Price

DEFINITION of 'Fixed Price'

The leg of a swap that is based on an unchanging interest rate. A plain vanilla interest rate swap is an exchange of two streams of cash flows. Both streams are based on the same amount of notional principal, but one stream pays interest on that notional principal at a fixed rate (or fixed price) and one stream pays interest on the notional principal at a floating rate (or floating price).

BREAKING DOWN 'Fixed Price'

The fixed-rate stream does not change for the duration of the swap, while the floating rate stream changes periodically over the duration of the swap as its benchmark interest rate, often LIBOR, changes in accordance with market conditions. Two parties, called counterparties, enter into such transactions to reduce their exposure to changes in interest rates or to attempt to profit from changes in interest rates.

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