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Financing – Debt finance

2.3 Interest rate swaps

Two parties agree to swap a floating stream of interest payments for a
fixed stream of interest payments and vice versa.

There is no exchange of principal.

Example:

XX Bank's swap rates are 3.00% – 3.10% against 12 month LIBOR.

Two rates are quoted to ensure the bank makes a profit.

If a company wanted to pay a fixed rate to the bank in exchange for a receipt of
the LIBOR rate (to swap a floating rate into a fixed rate), 3.10% would be paid by
the company to the bank.

Alternatively, if a company wanted to pay LIBOR rate in exchange for a fixed
receipt (to swap a fixed rate into a floating rate), only 3.00% would be paid by the
bank to the company.

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