Interest Rate Swap

An interest rate swap is a financial agreement where two parties exchange interest payments based on a specified amount of money, usually called the principal. Typically, one party pays a fixed interest rate while the other pays a variable (floating) rate that changes with market interest rates. This swap allows both parties to manage their interest rate risk—such as locking in predictable payments or benefiting from falling rates—without exchanging the principal amount itself. It’s a common tool used by businesses and investors to tailor their interest expenses or income to better match their financial strategies.