At Gulf Bank investments always have a way to move ahead. Interest Rate Swap is a powerful financial tool used by many companies to generate interest rate savings and to actively manage their interest rate exposures.

 

An IRS is a contractual agreement between the bank and the client to exchange interest payments over a period of time. It allows the company to change its floating rate borrowing into a fixed rate or fixed rate borrowing into a floating rate.

Description

• Corporations using interest rate swaps typically have extensive needs for raising capital. The companies use swap either to reduce interest expense or to manage interest rate exposure.
• Asset managers use IRS to diversify their investment portfolios and to increase yield on investments. They can purchase fixed rate corporate assets and, by using swaps, convert these assets into a floating rate.
• No principal is actually exchanged either initially or at the maturity of the contract. Instead, only periodic interest rate differentials are paid between the parties.
• The size of an IRS deal varies from US Dollar 20 TO 200 million, and the term from 1 to 30 years.
• The fixed rate payer in the swap is the party that pays the fixed rate and receives the floating rate. It is the party that wishes to hedge against interest rate rises.
• The fixed rate receiver in the swap is the party that pays the floating rate and receives the fixed rate. It is generally the bank.

The Contract

• A floating rate quotation in the swap is usually quoted on a money market basis. This interest rate assumes that the year base is 360 days and each month has the actual number of days.

• The floating rate index is normally the US Dollar Libor, 3 and 6 months rates are the most frequent used indices.

• The “bid” rate is the rate the customer receives, and the “offer” is the rate the customer pays.