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What is an interest rate swap agreement?

Basically, each party would swap their contractual rate with the other party because they believe they can get a lower rate in the long-term. For a swap to occur, one party would need a fixed rate and the other would need a floating rate. In an interest rate swap arrangement, both parties would be subject to interest rate risk, market risk, and credit risk.

As you can see in the visual below, Simone has the floating rate with her bank and Julia has the fixed rate with her bank. Simone and Julia would swap rates.


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