What is a swap trade?

A swap is a transaction in which two parties exchange fixed and floating interest-rate payments over a set period of time. The interest payments are calculated on a notional amount of principal. Swaps can give both parties access to money at an initial lower cost than what investors usually offer.

In a swap transaction, one party pays interest at a fixed rate and receives interest at a floating rate. The other party pays interest at a floating rate and receives interest at a fixed rate. As rates change over time, expense is shifted from one party to the other depending upon the direction the rates move. If rates go down, the floating-rate payer saves money while the fixed-rate payer loses money. If rates go up, the fixed-rate payer saves money while the floating-rate payer loses money.