Amortizing Swap
An amortizing swap involves two parties making a deal where one pays a fixed rate of interest and the other pays a floating rate of interest (another way to say it is a variable interest rate). Both payments are based on a set principal amount that decreases over time, such as a mortgage.
Let’s say Joe Investor buys a property with a variable interest rate tied to the short-term Treasury rate. Perhaps he could only qualify for this variable rate. He rents out the property for a fixed monthly payment. To protect himself from rising interest rates that would cause his mortgage payments to exceed his rent revenue, Joe makes a swap agreement with Alice Investor where he will exchange his variable rate for a fixed rate, avoiding most of the risk.
One thing to note: Joe and Jill don't trade assets. They just trade the interest payments for their assets. So a salary swap might involve you switching salaries with someone, while you both continue to perform the same jobs as before. Jobs don't change, just salaries. That's a swap.Related or Semi-related Video
Finance: What is a swap, and what is a s...50 Views
Finance allah shmoop what is a swap And what is
a swap Shin Um can we just say it's an
option to swap You know like microsoft is a micro
computer software thing or like the electrocution is electricity and
execution or the bromance is you know brother and romance
which is something totally different when dealing with gerbils Anyway
one day a guy was holding a swap turned a
corner wasn't looking where he was going then glam o
he ran into an option What came of it was
a super hybrid type of security were in a slop
like i swap you so many dollars for so many
euros is tacked onto an option You want the ability
to pay off your loan either in us dollars or
in euros assuming they still exist when your loan comes
due That whole brexit thing that issue have the option
to swap the flavor of payments you're making for the
hundred grand You borrowed no it's houses play out well
When the bond was issued one dollar bought you one
euro and the interest rate was eight percent So you
paid eight grand a year to rent that hundred for
ten years at which point you're going to pay it
all off simple but after five years the exchange rates
have drifted massively Magic fairy dust was sprinkled by wizards
all over europe They beat back the thirty two hour
work week Corruption unions and economic misery wrought by not
being able to compete with china russia in africa and
now amazingly the euro is a much stronger currency than
the u s dollar that's kind of a fictional story
here that we'll make enough In fact one euro buys
you two u s dollars like it when the euro
was first put out there So if you holding the
swap shin on the interest payment flavor of the hundred
grand you borrowed if you so choose you can pay
that eight grand in euros that is instead of the
eight thousand dollars a year in interest you can pay
for thousand euros It's almost a ziff your interest rate
was cut in half That's not really it's a value
is the same it's just the number of units were
cut have theirs You know that works And if you
live in europe and work in europe and we're paid
in euros Well it really is like a roman holiday
of interest rates of just want to focus on the
numbers But the values of the same there's No free 00:02:15.938 --> [endTime] lunch here even in swap shen lang
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