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. Forward Swap

    A swap agreement created through the synthesis of two swaps differing ...
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. Trading

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

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

    Interest Rate Swaps Explained

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

    Different Types of Swaps

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

    Hedging With Currency Swaps

    The wrong currency movement can crush positive portfolio returns. Find out how to hedge against it.
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. 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 >>
Hot Definitions
  1. Block (Bitcoin Block)

    Blocks are files where data pertaining to the Bitcoin network is permanently recorded.
  2. Fintech

    Fintech is a portmanteau of financial technology that describes an emerging financial services sector in the 21st century.
  3. Ex-Dividend

    A classification of trading shares when a declared dividend belongs to the seller rather than the buyer. A stock will be ...
  4. Debt Security

    Any debt instrument that can be bought or sold between two parties and has basic terms defined, such as notional amount (amount ...
  5. Taxable Income

    Taxable income is described as gross income or adjusted gross income minus any deductions, exemptions or other adjustments ...
  6. Chartered Financial Analyst - CFA

    A professional designation given by the CFA Institute (formerly AIMR) that measures the competence and integrity of financial ...
Trading Center