CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
US English

What are interest rate swaps (IRS)?

This is where one stream of fixed-rate interest payments is exchanged for a floating rate stream of interest payments.

The contract is based on an agreed principal amount – let's say $1 million. Delta Corp is currently receiving a fixed rate of 1.5 per cent interest per month on its principal amount, while Omega Investments receives a floating rate that is tied to the London Interbank Offered Rate – LIBOR + 1 per cent.

Delta Corp decides it wants to take a higher risk on a floating rate, and Omega Investments needs to lock in a secure monthly payment that doesn't change – so the two parties enter into swap agreement where Delta Corp pays Omega 1.5 per cent interest a month on the $1 million principal amount, and Omega pays Delta Corp LIBOR + 1 per cent.

These are customised contracts – the specifications are agreed between the counterparties – and are therefore not traded on exchanges. Again, it is very difficult for retail investors to gain access to IRS.

Who wins?

There are often mutual benefits, as one side must pay an agreed premium to gain a better cash flow from a swapped rate.

Test yourself

Are interest rate swaps traded on exchanges?

Previous lesson

What are forwards?

Next lesson

Risk and reward?

Looking for more?

Education Hub

You’ll find everything you need to know here; from how-to guides to investment strategies.

Trading Guides

Our in-depth guides will provide you some insights into the wide variety of financial instruments, their unique features and how to use them in your trading portfolio.

Trading Glossary


That's the number of terms in our glossary.

Do you know your CFDs from your IPOs or ETFs? Remove the mystery with our definitions glossary.

See all

Term of the day


Looking for a diversification definition? Diversification is a strategised form of risk management. It's a technique that incorporates an assortment of investments that are part of a portfolio. The aim is to minimise risk or volatility by...

Read more
The most common word

Active Order

During a day of trading a broker   will buy and sell. What they buy and sell, and how much they do it for, comes down to specific orders given to them by investors. An order is called active when it's running either for the duration of...

Read more

Still looking for a broker you can trust?

Join the 610,000+ traders worldwide that chose to trade with

1. Create & verify your account 2. Make your first deposit 3. You’re all set. Start trading