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.