Lesson 63 - Advanced Accounting Course

Lesson 63: Interest Rate Swaps and Their Role in Corporate Finance

💡 What Is an Interest Rate Swap?

An Interest Rate Swap is a financial contract between two parties where they exchange interest rate payments on a loan or investment — usually one fixed rate for one floating (variable) rate.

🔁 Think of it like “swapping” the way interest is paid—without changing the actual loan!

📌 Why Do Companies Use Interest Rate Swaps?

Companies use swaps to:

• 🔒 Stabilize interest payments (e.g., change floating to fixed)
  
  

• 🧮 Lower borrowing costs
  
  

• 💼 Manage risk (hedge against rising rates)
  
  

They don’t exchange the principal, only interest flows.

🔧 How Does It Work?

Let’s say both have $10 million in notional principal:

• Party A pays 5% fixed
  
  

• Party B pays LIBOR + 1% floating
  
  

• The payments are netted—only the difference is exchanged 💸
  
  

🧾 Real-Life Example

A company has a loan with variable interest (LIBOR + 2%) but wants stability.

✅ It enters a pay-fixed, receive-floating swap:

• Pays 4.5% fixed
  
  

• Receives LIBOR
  
  

📆 Every 6 months:

• If LIBOR = 3%, they receive 3% and pay 4.5% → Net payment: 1.5%
  
  

• If LIBOR = 5%, they receive 5% and pay 4.5% → Net gain: 0.5%
  
  

🛡️ The swap protects them if rates go up!

📊 Types of Interest Rate Swaps

💼 Corporate Finance Use Cases 

📚 Accounting for Interest Rate Swaps 

📈 Risks to Watch 

✅ Summary Table 

📌 Key Takeaways

• 🔄 Interest Rate Swaps help companies manage exposure to changing interest rates
  
  

• 💡 They can stabilize payments, reduce costs, or match financing needs
  
  

• 🧾 Accountants must ensure proper valuation, disclosure, and hedge documentation