What is the swap rate?

What is the swap rate?

swap-rates

What is the swap rate?

An interest rate swap is a contract in which two parties are trading a fixed-rate and variable-interest rate. Essentially, this contract converts a variable-rate loan into a fixed-rate loan.

The present value of the fixed-rate payment stream has to be on par with the present value of the variable-rate payment stream at the time of the swap contract. The interest rate that causes the present value of the fixed-rate payment stream to be equal with the variable-rate payment stream is what is defined as the swap rate.

Why is it important?

The swap rate is derived from other interest rates so it can also be referred to as the derivative interest rate. The 10-year LIBOR spot curve is mathematically derived from other interest rates and the forward curve is mathematically derived from the spot curve.

The reason the swap rate is important is that it is used as an index on billions of dollars of CMBS loans every year and trillions of dollars of swap contracts. Many real estate professionals should know that this interest rate is not a market rate, but is mathematically-derived from other interest rates in the financial markets.

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