LIBOR-in-Arrears Swap

AAA

DEFINITION of 'LIBOR-in-Arrears Swap'

A swap in which the interest paid on a particular date is determined by that date's interest rate rather than the interest rate of the previous payment date. A swap entails the exchange of one security for another in order to change the maturity (in the case of bonds), the quality of issues (bonds or stocks), or in response to changing investment objectives. A LIBOR-in-arrears swap is a type of swap where each payment is based upon the LIBOR at the end of the payment period. This is in contrast to a traditional LIBOR swap where the interest is based on the beginning or the original interest period. Also called in-arrears swap, swap-in-arrears, reset swap, and arrears swap.

INVESTOPEDIA EXPLAINS 'LIBOR-in-Arrears Swap'

LIBOR refers to the London Interbank Offered Rate, and is the interest rate at which banks can borrow funds from other banks in the Eurocurrency market. It is the world's most widely used short-term interest benchmark. The LIBOR-in-arrears structure was introduced in the mid-1980s to enable investors to take advantage of potentially falling interest rates. It is a strategy used by investors and borrowers who are directional on the interest rates and who believe they will fall. Once the rate is defined, the rate is applied retroactively (in "arrears") to that period.

RELATED TERMS
  1. Bond

    A debt investment in which an investor loans money to an entity ...
  2. LIBOR

    LIBOR or ICE LIBOR (previously BBA LIBOR) is a benchmark rate ...
  3. Arrears

    Overdue debt, liability or obligation. An account is said to ...
  4. Interest Rate

    The amount charged, expressed as a percentage of principal, by ...
  5. Swap

    Traditionally, the exchange of one security for another to change ...
  6. Strike Width

    The difference between the strike price of an option and the ...
RELATED FAQS
  1. What is the difference between LIBOR, LIBID and LIMEAN?

    LIBOR, LIBID and LIMEAN are all reference rates used to benchmark short-term interest rates. The London Interbank Offered ... Read Full Answer >>
  2. What is the difference between LIBID and LIBOR?

    Both LIBID and LIBOR are rates primarily used by banks in the London interbank market. The London interbank market is a ... Read Full Answer >>
  3. What risks should I consider taking a short put position?

    The risks to consider before taking a short put position are the odds of sustained weakness in the asset price and a spike ... Read Full Answer >>
  4. What happens if a software glitch fails to execute the strike price I set?

    If you've ever suffered the frustrating experience of having an order not filled or had a strike price fail to execute because ... Read Full Answer >>
  5. In what market situations might a short put be a profitable trade?

    Short puts would be a profitable trade in low-volatility bull markets or range-bound markets. Selling puts is a strategy ... Read Full Answer >>
  6. What is the relationship between implied volatility and the volatility skew?

    The volatility skew refers to the shape of implied volatilities for options graphed across the range of strike prices for ... Read Full Answer >>
Related Articles
  1. Bonds & Fixed Income

    Are High-Yield Bonds Too Risky?

    Despite their reputation, the debt securities known as "junk bonds" may actually reduce risk in your portfolio.
  2. Credit & Loans

    How Interest Rate Cuts Affect Consumers

    Traders rejoice when the Fed drops the rate, but is it good news for all? Find out here.
  3. Options & Futures

    An Introduction To LIBOR

    This influential rate is published daily in Britain, and felt all around the world.
  4. Investing Basics

    What is a Greenshoe Option?

    A greenshoe option is a provision in an underwriting agreement that allows the underwriter to buy up to 15% of the shares in an IPO at the offer price.
  5. Investing Basics

    What Does a Clearing House Do?

    A clearing house is a third-party agency or separate entity that acts as a go-between for buyers and sellers in financial markets.
  6. Options & Futures

    How The New NYSE Binary Options Work

    The New York Stock Exchange has launched its own version of binary options called Binary Return Derivatives Options or ByRDs.
  7. Mutual Funds & ETFs

    4 Ways You Can Invest In Gold Without Holding It

    Owning gold can be a store of value and a hedge against unexpected inflation. Holding physical gold, however, can be cumbersome and costly. Fortunately, there are several ways to own gold without ...
  8. Active Trading Fundamentals

    How To Short Amazon Stock

    With the stock reaching all-time highs and the company gambling on several new business lines, many investors may feel it's a good time to short sell Amazon.
  9. Investing Basics

    What is Meant by Implied Volatility?

    The estimated volatility of a security's price.
  10. Professionals

    Structured Notes: What You Need to Know

    Structured notes are complex, high risk and might not be suitable for individual investors. Here's why.

You May Also Like

Hot Definitions
  1. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
  2. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  3. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
  4. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
  5. Current Account Deficit

    A measurement of a country’s trade in which the value of goods and services it imports exceeds the value of goods and services ...
  6. International Monetary Fund - IMF

    An international organization created for the purpose of: 1. Promoting global monetary and exchange stability. 2. Facilitating ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!