What is a 'Swap Curve'

A swap curve identifies the relationship between swap rates at varying maturities. A swap curve is the name given to the swap's equivalent of a yield curve.


When individuals and businesses borrow money from a lending institution, such as a bank, they have to make interest payments on the loaned amount. The interest rates applied to a loan can either be fixed or floating rates. Sometimes an entity with a fixed rate loan might prefer to have a loan with a floating rate instead, and a company with a floating interest payment might prefer to make fixed payments. Both companies can enter into a contractual agreement known as an interest rate swap.

An interest rate swap is a financial derivative which involves the swapping or exchange of interest rates. One counterparty will pay a fixed rate, and the other will pay a floating rate based on a benchmark, such as the LIBOR, EURIBOR, or BBSY. At contract initiation, swaps are generally priced to have zero initial value and zero net cash flow. For example, consider a swap entered into by two entities in which one party has a loan with a 4.5% fixed interest. If the LIBOR is expected to remain at 3.5%, then the contract will stipulate that the party paying the floating interest rate will pay LIBOR plus a margin. In this case, since the swap contract must have zero value at initiation point, the floating payment will be 3.5% + 1% (or 100 basis points), equal to the fixed rate. As time goes by, interest rates change, resulting in a change in the floating interest rate.

When interest rates change, the swap rate quotes given by banks will also change. Each day, information on swap rates across various maturities quoted by banks are collected and plotted on a graph, known as the swap curve. Due to the time value of money and the expectations of changes in the reference rate, different maturities will have different swap rates.

Used in similar manner as a bond yield curve, the swap curve helps to identify different characteristics of the swap rate versus time. The swap rates are plotted on the y-axis, and the time to maturity dates are plotted on the x-axis. So, a swap curve will have the different rates for 1-month LIBOR, 3-month LIBOR, 6-month LIBOR, and so on. In other words, the swap curve shows investors the possible return that can be gained for a swap on different maturity dates. The longer the term to maturity on an interest rate swap, the greater its sensitivity to interest rate changes. In addition, since longer-term swap rates are higher than short-term swap rates, the swap curve is typically upward sloping.

The swap curve is used in financial markets as a benchmark for establishing the funds rate, which is used to price fixed income products such as corporate bonds and mortgage-backed securities (MBS). Over-the-counter derivatives such as nonvanilla swaps and forex futures are priced based on the information depicted on the swap curve. In addition, the swap curve is used to gauge the aggregate market perception of conditions in the fixed-income market.

The yield curve and swap curve are of similar shape, however, there can be differences between the two. This difference, which can be positive or negative, is referred to as the swap spread. For example, if the rate on a 10-year swap is 4% and the rate on a 10-year Treasury is 3.5%, the swap spread will be 50 basis points. The swap spread on a given contract indicates the associated level of risk which increases as the spread widens.

  1. Liability Swap

    A liability swap is a financial derivative in which two parties ...
  2. Absolute Rate

    The absolute rate is the fixed portion of an interest rate swap, ...
  3. Swap Bank

    A swap bank is an institution that acts as a broker to two unnamed ...
  4. Floating Price

    The floating price is a leg of a swap contract that depends on ...
  5. Swap

    A swap is a derivative contract through which two parties exchange ...
  6. Delayed Rate Setting Swap

    A delayed rate setting swap is an exchange of cash flows, one ...
Related Articles
  1. Trading

    An Introduction To Swaps

    Learn how these derivatives work and how companies can benefit from them.
  2. 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.
  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. Investing

    CFTC Probes Banks' Use of Interest Rate Swaps

    U.S. regulators are probing banks' trading and clearing of interest rate swaps, which played a central role in the 2008 financial crisis
  5. 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.
  6. Investing

    The Advantages Of Bond Swapping

    This technique can add diversity to your portfolio and lower your taxes. Find out how.
  7. Trading

    Introduction To Counterparty Risk

    Unlike a funded loan, the exposure from a credit derivative is complicated. Find out everything you need to know about counterparty risk.
  8. Investing

    PIMCO’s Mutual Fund for Investment Grade Bonds (PTTRX)

    Explore the complicated and often arcane makeup of the PIMCO Total Return Fund, and identify the fund's management style and top five holdings.
  9. Investing

    A Guide to Real Estate Derivatives

    Real estate derivatives provide exposure to the real estate market without ownership requirement by using the performance of a real estate return index.
  10. 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.
  1. When was the first swap agreement and why were swaps created?

    Learn about the history of swap agreements, the first swap agreement between IBM and the World Bank, and how swaps have evolved ... Read Answer >>
  2. How do companies benefit from interest rate swaps?

    Learn how companies can swap interest rate payments and mutually benefit. Find out how these swaps arbitrage differences ... Read Answer >>
  3. What Is a 'Gypsy Swap'?

    A gypsy swap allows a company to raise capital without issuing debt or holding a secondary offering. Read Answer >>
  4. What is the difference between the Sarbanes-Oxley Act and the Dodd-Frank Act?

    Learn about the differences between the Sarbanes-Oxley Act and the Dodd-Frank Act, and understand the reasons why each bill ... Read Answer >>
  5. Interest Rate Risk Between Long-Term and Short-Term Bonds

    Find out the differences and effects of Interest rates between Long-term and short-term bonds. Read how interest rate risk ... Read Answer >>
Trading Center