Rate debt that expects interest rates to fall may engage in a swap agreement to accept interest at fixed rates.
An interest swap is a type of forwarding contract under which one stream of future interest payment is exchanged for another. This interest will be based on a specified principal account. So, it is a swap agreement where there the two companies can exchange cash flows at different times. The agreement is a type of financial derivative agreement.
This swap agreement usually is for a set period of time. This type of agreement is usually initiated by at least one of the series of cash flows. The cash flow can be determined at random or it can be uncertain like the interest rate. Under this one stream of future interest, payment is exchanged for another based on the principal account.
These transactions take place over the counter between private parties. Firms and some financial institutions dominate the swaps market. Most individuals do not participate in the interest swap. As it takes place over the counter there are always changes of default on the swap.
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