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Key Financial Market Concepts, 2nd Edition by Bob Steiner

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Interest Rate Swap (IRS)

Definition

An interest rate swap (IRS) is an exchange of one series of interest payments, at agreed intervals over an agreed period, for another series, each based on an agreed notional principal amount but with no actual exchange of principal. If the timing of the two payments coincides, they are netted.

How is it used?

Any swap is the exchange of one set of cashflows for another considered to be of equal value. A straightforward interest rate swap in particular is similar to a forward rate agreement (FRA), but is applied to a series of cashflows over a longer period of time, rather than to a single period.

As with most instruments, an IRS may be used for hedging, speculation or arbitrage, depending on whether it is ...

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