DEFINITION of 'Rate Anticipation Swap'

A type of swap in which bonds are exchanged according to their current duration and predicted interest rate movements. A rate anticipation swap is often made in order to take advantage of more profitable bond opportunities. Rate anticipation swaps are speculative in nature, since they depend on the outcome of the expected interest rate change. Various bond types respond differently to rising or falling interest rates and those who participate in rate anticipation swaps generally choose bonds based on performance.

BREAKING DOWN 'Rate Anticipation Swap'

As an example, investors may swap short-term bonds for long-term bonds if interest rates are expected to decline. Conversely, investors may swap longer-term bonds for short-term bonds if interest rates are expected to rise. A swap is an exchange of one security for another to change the maturity, the quality of the issues in a bond portfolio, or due to a change in the investor's goals and strategies.

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RELATED FAQS
  1. 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 >>
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    Read about interest rate swaps and why these transactions are performed by institutional actors in the bond market, not individual ... Read Answer >>
  3. 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 >>
  4. 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 >>
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