An interest rate swap is used to fix the interest rate on floating-rate loans, such as loans linked to Euribor rates.
An interest rate swap is a contract between the bank and the customer, in which the customer typically pays interest linked to a fixed interest rate to the bank, and the bank pays the customer interest linked to a floating interest rate. This arrangement allows the customer to pay, in practice, a fixed interest on its loan instead of a floating interest.
Hedges against rising interest rates and provides certainty over the amount of the monthly loan payment. The fixed interest rate remains the same over the entire contract period. A single interest rate swap can be used to hedge a single loan or several loans.
Lower interest rates will not mean lower interest expenses. Early cancellation of the contract will always be based on the market price, meaning that one of the parties must compensate the other.
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