What is a swap rate?
It’s the rate associated with the fixed element of a swap. It’s generally calculated based on what’s happening in the market where the securities involved are traded. You’ll typically have interest rate swaps or currency swaps.
Where have you heard about swap rates?
Because the swap rate can increase or decrease beyond the fixed rate over time, lenders and investors will scrutinise what’s likely to happen in the market in the future, and consider how those shifts will affect the rate in both the short term and longer term.
What you need to know about swap rates.
In an interest rate swap, the fixed interest rate is exchanged for a benchmark rate such as Libor . So if Libor goes up, the interest payments go up. It’s fairly common for lenders to make use of the swap rate as a means of arranging the borrowing rates that apply when one institution lends funds to another.
When the rate is associated with currency swaps, it’s usually based on the difference that exists between the spot rate and the forward exchange rate for that currency. Whether positive or negative, the difference is normally presented as points.
Find out more about swap rates.
For background information, read our definitions of currency swap and interest rate swap.