LONG TERM INTEREST RATE SWAP Meaning and
Definition
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A long-term interest rate swap refers to a financial derivative transaction conducted between two parties to exchange future interest payments on a notional amount of principal. This swap typically involves the exchange of fixed-rate interest payments for floating-rate interest payments over an extended period, generally exceeding one year.
In this arrangement, one party assumes the fixed-rate interest payment obligation, while the other party takes on the floating-rate interest payment obligation. The fixed-rate payer commits to making regular fixed interest payments throughout the term of the swap, while the floating-rate payer agrees to make periodic interest payments based on a reference rate, such as LIBOR or government bond yields.
The primary goal of a long-term interest rate swap is to manage or mitigate interest rate risk. The parties involved may have different objectives for entering into the swap, such as hedging against future interest rate fluctuations or speculation on the direction of interest rates.
Long-term interest rate swaps are often utilized by financial institutions, corporations, and investors to manage their exposure to interest rate movements. By engaging in this type of swap, the parties can potentially reduce their interest rate risk, alter the cash flow characteristics of their debt instruments or investments, and adjust their overall portfolio risk profile.
Common Misspellings for LONG TERM INTEREST RATE SWAP
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