interest rate swap

interest rate swap

Interest Rate Swap is a contract between two parties to exchange interest payments, which are at a pre-agreed and specified in the contract amount, called the contract sum. That is, in a predetermined date (or the date, if the swap involves the exchange of payments over a certain period of time during the contract period), one party pays the other a payment, calculated on the basis of fixed interest rates, and in return receives payment, calculated on the basis of the floating interest rate (for example, at a rate of LIBOR). In practice such payments неттингуются and one of the parties pays only the difference of the above payments.
Among the advantages of the interest rate swap is the fact that they give the possibility to reduce the cost of raising and servicing of the loan. For example, the borrower, with the possibility of obtaining a loan with a fixed interest rate, wants to take a loan with interest at a floating rate, but is unable to get a loan on favorable terms. At that, there is another borrower, which has advantages in obtaining a loan, the interest on which are calculated on the basis of floating rates, but he wants to get a loan at a fixed interest rate. In such a case, the parties may conclude an interest rate swap, which provides for the exchange of payments, which are calculated on the basis of the fixed and floating interest rates on the loan amount. As a rule, the parties do not exchange of the principal amounts of the Treaty, and list only payments, calculated on the basis of the difference contractual interest rates.
Consider an interest-rate swap on an example.
The first counterparty of the swap (the company) can take a credit in the amount of 10 million. USD with maturity of 3 years with a fixed rate of 12% or variable rate equal to LIBOR +1%.
The Bank may receive in the interbank market of credit resources in the same amount and on the same term variable rate equal to LIBOR or with a fixed rate of 10%.
In this case, the difference between fixed interest rate greater than the difference between variable rates on 1%.
For the conclusion of the swap, the company takes a loan with an interest rate equal to LIBOR +1%and the Bank with an interest rate of 10%.
After the conclusion of the swap, the Bank periodically company pays a floating rate of interest of LIBOR, and the company periodically shall pay to the Bank a fixed interest rate is 10.5% (0.5% of the premium of the Bank, 10% - fixed percentage of the Bank's commitments for the company loans). Through the swap, the company reduces the costs of financing the loan with a fixed interest rate at 0.5%, and the Bank also obtains cost savings for financing of the debt with variable interest rate equal to 0,5%.

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