What Is a 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.
The term is also specifically 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.
[Important: Investors shouldn't only consider the amount of yield they receive from payers, but they should also factor in their personal tax brackets.]
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.
- The term payer is used to describe any entity that issues a payment to another entity.
- In the context of fixed income instruments, a payer refers to the issuer of the debt; this may be a periodic coupon or interest payments that are made to the investor.
- If you are payer in an interest rate swap, it can be financially advantageous if you correctly predict that interest rates are going to climb.
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.
Governments as Payers
In some cases, the governments are the payers, with various instruments, including the following types of vehicles:
- Treasury bonds. These are issued by the federal government to finance its budget deficits. These are considered to be risk-free, and consequently, the payer offers the smallest yields.
- Other U.S. government bonds. Issued by federal agencies like Fannie Mae and Ginnie Mae, yields are higher than Treasury yields, but interest on the bonds is taxable at both the federal and state levels.
- Foreign bonds. Payers promise to pay back the principal and make fixed interest payments in another currency. Exchange rates thus tend to determine how a foreign bond fund performs—more-so than interest rates.
- Mortgage-backed bonds. With a high face value of $25,000, their value drops when the rate of mortgage prepayment rates increases rises. Consequently, they don't benefit from declining interest rates, as other bonds do.
- Municipal bonds. "Munis" are issued by U.S. states and local governments, in both high-yield and investment-grade and high-yield forms.