What Are the Benefits of Interest Rate Swaps?
An interest rate swap is an agreement in which the parties exchange the income stream generated by interest-bearing investments. Typically, one party swaps the income stream from a fixed rate investment for the variable rate income produced by investments owned by the other party. The actual investment properties are not exchanged, only the cash flows that they produce.
Risk Management
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A company’s management may find interest rate swaps useful as a means of reducing the risk interest rates will drop by switching variable rate interest income for a fixed rate income stream. Typically, the other party is more interested in increasing profit potential and is willing to take on added risk by swapping a fixed rate interest stream for one that is variable. Both parties benefit by better matching financial positions to company needs.
Financing Access
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In some cases, a company may have access to financing with a variable interest rate, but not fixed rate borrowing. An interest rate swap can allow this firm to tap into the creditworthiness of another firm to get the type of financing management desires.
References
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Based in Atlanta, Georgia, W D Adkins has been writing professionally since 2008. He writes about business, personal finance and careers. Adkins holds master's degrees in history and sociology from Georgia State University. He became a member of the Society of Professional Journalists in 2009.