Interest rate swap refers to an agreement that exchange interest receipts. It also means interest payment obligations. Generally, interest swap is used to adjust one’s risk exposure. It also helps to speculate on interest-rate changes. Interest-rate swap is also used to convert an instrument or obligation from a fixed to a floating rate. It is also used to convert from floating to fixed rate. The parties to such an agreement are termed “counterparties”.
Interest rate swap agreements provide a powerful tool for altering the character of assets and liabilities, fine tuning risk exposure, lowering the cost of financing or speculating on interest rate fluctuation. Borrowers can rely on interest rate swaps to reduce exposure to adverse changes in interest rates or to obtain financing characteristics unavailable through conventional lending. Interest rate swaps can modify a borrower's all in funding costs from fixed-to-floating, floating-to-fixed or a combination of both.