DEFINITION of 'Payer'

The term payer refers to an entity that makes a payment to another entity. While the term payer generally refers to someone who pays a bill for products or services received, in the financial context it often refers to the payer of an interest or dividend payment. Payer is used when discussing swap agreements. In an interest rate swap, the payer is the party who wants to pay a fixed interest rate and receive a floating rate of interest.

BREAKING DOWN 'Payer'

The term payer has many applications across finance. In a purchase agreement, the payer can be the person or company purchasing an item or service. The payee is the one receiving payment and often delivering that good or service. In the case of a dividend paying stock, the payer is the issuer of the stock who is paying the investor the stock dividend.

In the case of fixed income instruments, the issuer of the debt is the payer of periodic coupon or interest payments to the investor. In the case of an interest rate swap, the payer is the party that pays a fixed interest rate throughout the life of the swap. In return, they receive a payment based upon a floating interest rate. Being the payer in an interest rate swap can be useful if you think interest rates are going to go up. As the payer, you pay a fixed rate to the counterparty and receive from them a payment that can increase if interest rates increase. This would lead to a profitable position.

RELATED TERMS
  1. Callable Swap

    A callable swap is a contract to exchange fixed for variable ...
  2. Extendable Swap

    An extendable swap is a swap that provides a party the option ...
  3. Payee

    A payee is the party in an exchange who receives payment.
  4. Constant Maturity Swap - CMS

    In a constant maturity swap, the floating interest portion resets ...
  5. Swap Rate

    The swap rate is the fixed portion of a swap as determined by ...
  6. Putable Swap

    A putable swap is a cancellable interest rate swap, in which ...
Related Articles
  1. Investing

    Understanding Total Return Swaps

    A total return swap is a contract in which a payer and receiver exchange the credit risk and market risk of an underlying asset.
  2. 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.
  3. Trading

    Different Types of Swaps

    Identify and explore the most common types of swap contracts. Swaps are derivative instruments that represent an agreement between two parties to exchange a series of cash flows over a specific ...
  4. Trading

    How To Value Interest Rate Swaps

    An interest rate swap is a contractual agreement between two parties agreeing to exchange cash flows of an underlying asset for a fixed period of time.
  5. Trading

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

    A full analysis of how the swap industry works.
  6. Insights

    Do Interest Rate Changes Affect Dividend Payers?

    Interest rate changes have an effect on prices of dividend-rich stocks in interest rate sensitive sectors like utilities, pipelines, telecommunications and REITs.
  7. Personal Finance

    How to Cancel a Check

    If you've had a personal check lost or stolen, the next best step is to cancel the check by putting a stop payment on it.
  8. Investing

    The Advantages Of Bond Swapping

    This technique can add diversity to your portfolio and lower your taxes. Find out how.
  9. Investing

    The Fast-Paced World of Libor & Fixed Income Arbitrage

    LIBOR is an essential part of implementing the swap spread arbitrage strategy for fixed income arbitrage. Here is a step-by-step explanation of how it works.
  10. Investing

    How Swaptions Can Reduce Risk in Portfolios

    How can investing in Swaptions reduce risk in portfolios.
RELATED FAQS
  1. What is the difference between derivatives and swaps?

    Swaps comprise just one type of the broader asset class called derivatives. Read Answer >>
  2. How do companies benefit from interest rate and currency swaps?

    Interest rate and currency swaps help companies manage exposure to rate fluctuations and acquire a lower rate than they would ... Read Answer >>
  3. How do currency swaps work?

    Learn how a currency swap works, including who uses these transactions, and the mechanics and purpose of the different cash ... Read Answer >>
  4. Who needs to fill out IRS Form Schedule B?

    If you have several investments, there's a good chance you'll need to fill out a IRS Form Schedule B. Read Answer >>
Trading Center