A derivative contract where two parties exchange interest payment streams on a notional principal amount, typically swapping fixed-rate payments for floating-rate payments. This allows entities to manage interest rate risk or speculate on rate movements without exchanging the underlying principal.
Combines 'interest' from Latin 'interesse' (to be between/concern) and 'swap' from Middle English meaning 'to strike/exchange.' Interest rate swaps were pioneered in 1981 when IBM and the World Bank exchanged different currency debt obligations, revolutionizing corporate finance.
Interest rate swaps are like agreeing to split dinner bills differently with a friend - you might pay the fixed appetizer cost while they cover the variable main course price, even though you're both eating the same meal! Banks use these to transform their lending from fixed to floating rates (or vice versa) worth over $400 trillion globally.
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