See: IOU. Cue the Barney theme song: "IOU, UOMe. We're a happy family..."
Yes, that's how it works in a liability swap. Your debts become mine; mine become yours.
A credit swap involves trading the proceeds from an investment in a debt obligation. You hold a 10-year bond paying a fixed rate of 5% a year. Meanwhile, your cousin has a 10-year floating-rate bond currently paying 4%, but with the ability to move around as general interest rates move. You make a trade. All the cash you earn from your bond goes to your cousin. All your cousin's proceeds go to you. You don't actually trade ownership of the bonds...just the amount earned from the investments.
Okay, so that situation represents a credit swap. A liability swap works under the same premise, only with money you owe instead of money you earn.
Imagine the other side of the credit swap situation. That 5% fixed rate bond was issued by Steady Payment Corp. Meanwhile, Changing Times Inc. issued the floating-rate bond your cousin bought. Those companies enter a liability swap. Now Steady Payment will pay the amount owed to your cousin and Changing Times will pay the amount owed to you. They are doing a criss-cross of who pays whom...a liability swap.
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Finance Allah shmoop What is a crude liability You've been
taking free rides toe work from your vampire buddy Bernie
Yep He not only sucks he flies to you promised
him four bucks a ride payable a soon as daylight
savings makes you know the daylight too bright for him
to fly He could only give you a ride when
it's totally dark outside so you know he's got a
pretty bad sun allergy As you might guess Well anyway
after a hundred rides you realize that your crude liability
to Bernie is four hundred bucks Right there is the
math So that's a simple version Large companies with big
demands for materials or services or rent or whatever is
typically carry large at crude liabilities rights money they owe
And as you might guess they buy much or most
are almost all of their products on credit you know
credit given by the company who sold the product in
the first place Well guess what those liabilities at Crew
or just add up the company's got to pay its
bills eventually Right so big a crude liability numbers are
dangerous If you see a company having huge accounts liabilities
payable on their balance sheet So they keep adding up
until the company who took them well writes a check
and pays down that liability But you know don't worry
if you don't pay up for those rides Bernie accepts 00:01:14.21 --> [endTime] alternative methods of Payment what Oh
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