Question

What is an interest rate swap?

Answer 1

A swap is a kind of derivative where the cash flows are exchanged. An interest rate swap is a kind of contract in which two parties agree to exchange a series of future stream of cash flows based on a certain principal amount. The interest cash flow being exchanged can be based on the fixed interest rate or it can be based on the floating rate where it is linked to a benchmark. In the Interest rate swap it can be also be that one party is paying the fixed rate and the other party is paying the floating rate or both parties are paying floating or fixed rate.