Floating Price

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DEFINITION of 'Floating Price'

The leg of a swap that is based on a fluctuating interest rate. In a plain vanilla interest rate swap, there are two streams of cash flows. Each stream is 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).

INVESTOPEDIA EXPLAINS 'Floating Price'

While the fixed-rate stream does not change for the duration of the swap, the floating rate stream changes periodically. The floating rate will adjust as its benchmark interest rate, changes in accordance with market conditions. The benchmark is often LIBOR, but may also be the yield on one-year U.S. Treasuries or another interest rate. Two parties, called counterparties, enter into fixed-for-floating swap transactions to reduce their exposure to changes in interest rates or to attempt to profit from changes in interest rates.

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