DEFINITION of 'Index Amortizing Swap - IAS'

An interest rate swap where the notional principal amount declines or is amortized when interest rates decline. An index amortizing swap (IAS) is basically an over-the-counter contract between two parties on an amortizing notional principal swap that may decrease over the life of the swap. The notional principal amortizes or declines more rapidly when short-term interest rates - indexed to LIBOR or another widely-used rate index - decline, and amortizes more slowly when short-term rates rise.

Also known as an index amortizing rate (IAR) swap or an index principal swap.

BREAKING DOWN 'Index Amortizing Swap - IAS'

In a typical index amortizing swap, a bank or insurance company receives interest payments based on a fixed rate while paying its counterparty a floating rate of interest indexed to short-term LIBOR.

The term "amortizing" in an index amortizing swap is not meant to imply payment of principal, but rather, refers to the declining notional principal amount that forms the basis for interest payments.

Index amortizing swaps are particularly useful to hedge against prepayment risk in mortgage-backed securities.

RELATED TERMS
  1. Amortizing Swap

    An exchange of cash flows, one of which pays a fixed rate of ...
  2. Notional Principal Amount

    In an interest rate swap, the predetermined dollar amounts on ...
  3. Forward Swap

    A swap agreement created through the synthesis of two swaps differing ...
  4. Swap Bank

    A financial institution that acts as an intermediary for interest ...
  5. Swap Rate

    The rate of the fixed portion of a swap as determined by its ...
  6. Swap Dealer

    An individual who acts as the counterparty in a swap agreement ...
Related Articles
  1. Trading

    Currency Swap Basics

    Find out what makes currency swaps unique and slightly more complicated than other types of swaps.
  2. Trading

    What Warren Buffet Calls "Weapons of Mass Destruction": Understanding the Swap Industry

    A full analysis of how the swap industry works.
  3. Trading

    Interest Rate Swaps Explained

    Plain interest rate swaps that enable the parties involved to exchange fixed and floating cash flows.
  4. Investing

    How To Read Interest Rate Swap Quotes

    Puzzled by interest rate swap quotes terminology? Investopedia explains how to read the interest rate swap quotes
  5. Investing

    Explaining Amortization In The Balance Sheet

    Amortization occurs when an asset’s value decreases over time, usually over its estimated useful life.
  6. Trading

    Different Types of Swaps

    Investopedia explores the most common types of swap contracts.
  7. Investing

    Explaining Amortization In The Balance Sheet

    Amortization is important to account for intangible assets. Read to find out more about amortization.
  8. Personal Finance

    What is an Amortization Schedule?

    An amortization schedule is a table that shows the amounts of principal and interest that comprise each loan payment.
  9. Investing

    Amortization

    Amortization and depreciation are two ways to prorate the cost of an asset's life. Learn more about the former and how it it's calculated.
  10. Investing

    The Advantages Of Bond Swapping

    This technique can add diversity to your portfolio and lower your taxes. Find out how.
RELATED FAQS
  1. 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 Answer >>
  2. What does the notional principal of a derivative contract refer to?

    Find out more about the notional principal amount, interest rate swap agreements and how the notional principal amount in ... Read Answer >>
  3. What would motivate an entity to enter into a swap agreement?

    Learn why parties enter into swap agreements to hedge their risks, and understand how the different legs of a swap agreement ... Read Answer >>
  4. What are interest rate swaps on the OTC market?

    Learn about interest rate swaps and how they are traded over the counter, and understand the impact of Dodd-Frank on swaps ... Read Answer >>
  5. Can individual investors profit from interest rate swaps?

    Find out how individual investors can speculate on interest rate movements through interest rate swaps by trading fixed rate ... Read Answer >>
  6. 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 Answer >>
Hot Definitions
  1. Buyback

    The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies ...
  2. Tax Refund

    A tax refund is a refund on taxes paid to an individual or household when the actual tax liability is less than the amount ...
  3. Gross Domestic Product - GDP

    The monetary value of all the finished goods and services produced within a country's borders in a specific time period, ...
  4. Inflation

    The rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of ...
  5. Merchandising

    Merchandising is any act of promoting goods or services for retail sale, including marketing strategies, display design and ...
  6. Small Cap

    Refers to stocks with a relatively small market capitalization. The definition of small cap can vary among brokerages, but ...
Trading Center