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. Swap

    A derivative contract through which two parties exchange financial ...
  3. Accreting Principal Swap

    A derivative where counterparties exchange financial instrument ...
  4. Airbag Swap

    An interest rate swap whose notional value adjusts according ...
  5. Foreign Currency Swap

    An agreement to make a currency exchange between two foreign ...
  6. Notional Principal Amount

    In an interest rate swap, the predetermined dollar amounts on ...
Related Articles
  1. Managing Wealth

    An In-Depth Look At The Swap Market

    The swap market plays an important role in the global financial marketplace; find out what you need to know about it.
  2. Trading

    An Introduction To Swaps

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

    How Are Interest Rate Swaps Valued?

    When trading in financial markets, higher returns are generally associated with higher risk. Hedge your risk with interest rate swaps.
  4. Trading

    Currency Swap Basics

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

    What's an Interest Rate Swap?

    An interest rate swap is an exchange of future interest receipts. Essentially, one stream of future interest payments is exchanged for another, based on a specified principal amount.
  6. 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
  7. Trading

    Interest Rate Swaps Explained

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

    Explaining Amortization In The Balance Sheet

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

    Different Types of Swaps

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

    Explaining Amortization In The Balance Sheet

    Amortization is important to account for intangible assets. Read to find out more about amortization.
RELATED FAQS
  1. 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 >>
  2. 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 >>
  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. 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 >>
  5. 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 >>
  6. 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 ... Read Answer >>
Hot Definitions
  1. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  2. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  3. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  4. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  5. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  6. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
Trading Center