Lesson 3 of 6 · All lessons in this module
Lesson 3 of 6 · 12 min
Why issuers and investors use swaps
Swaps let issuers transform the interest rate profile of their debt and let investors change portfolio duration without trading bonds, because a receive-fixed swap behaves like a long fixed-rate bond and a pay-fixed swap like a short one.
In short
- Financial intermediaries use FRAs and short-term interest rate futures to manage rate risk period by period; issuers and investors mostly use swaps.
- An issuer with a floating-rate loan who pays fixed on a matching swap locks in an all-in cost of swap rate + loan spread.
- Receive fixed, pay floating ≈ long fixed-rate bond + short floating-rate note (FRN): it gains when rates fall and adds duration.
- Pay fixed, receive floating ≈ long FRN + short fixed-rate bond: it gains when rates rise and reduces duration.
- One swap replaces many forward contracts, cutting administrative burden; swaps are liquid and widely used as benchmarks.
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