Interest Rate Swaps

An interest rate swap (IRS) is a financial derivative contract in which two parties agree to exchange interest payment obligations on a specified principal amount, often referred to as the notional amount, over a set period. Typically, one party pays a fixed interest rate, while the other pays a floating rate that is linked to a benchmark, such as LIBOR or SOFR. The notional principal is not exchanged; instead, the parties only exchange the difference in interest payments, which helps manage or hedge exposure to interest rate fluctuations. Interest rate swaps are commonly used by businesses, financial institutions, and investors to reduce borrowing costs, hedge interest rate risk, or adjust asset/liability profiles.