Fixed-For-Floating Swap

AAA

DEFINITION of 'Fixed-For-Floating Swap'

An advantageous arrangement between two parties (counterparties), in which one party pays a fixed rate, while the other pays a floating rate.

INVESTOPEDIA EXPLAINS 'Fixed-For-Floating Swap'

To understand how each party would benefit from this type of arrangement, consider a situation where each party has a comparative advantage to take out a loan at a certain rate and currency. For example, Company A can take out a loan with a one-year term in the U.S. for a fixed rate of 8% and a floating rate of Libor + 1% (which is comparatively cheaper, but they would prefer a fixed rate). On the other hand, Company B can obtain a loan on a one-year term for a fixed rate of 6%, or a floating rate of Libor +3%, consequently, they'd prefer a floating rate.

Through an interest rate swap, each party can swap its interest rate with the other to obtain its preferred interest rate

Note that swap transactions are often facilitated by a swap dealer, who will act as the required counterparty for a fee.

RELATED TERMS
  1. Topping-Up Clause

    A condition implemented in a back-to-back or two-currency loan. ...
  2. Currency Swap

    A swap that involves the exchange of principal and interest in ...
  3. Interest Rate Swap

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

    Traditionally, the exchange of one security for another to change ...
  5. Fixed-For-Fixed Swaps

    An arrangement between two parties (known as counterparties) ...
  6. Arrears Swap

    An interest rate swap in which the floating payment is based ...
Related Articles
  1. An Introduction To Swaps
    Options & Futures

    An Introduction To Swaps

  2. How Companies Use Derivatives To Hedge ...
    Active Trading

    How Companies Use Derivatives To Hedge ...

  3. The Government And Risk: A Love-Hate ...
    Insurance

    The Government And Risk: A Love-Hate ...

  4. Can Good News Be A Signal To Sell?
    Fundamental Analysis

    Can Good News Be A Signal To Sell?

comments powered by Disqus
Hot Definitions
  1. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  2. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  3. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  4. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
  5. Gresham's Law

    A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new ...
  6. Limit-On-Open Order - LOO

    A type of limit order to buy or sell shares at the market open if the market price meets the limit condition. This type of ...
Trading Center