Alternative Explanations of Interest Rate Swaps: A Theoretical and Empirical Analysis

Abstract

0 An interest rate swap is a transaction in which two parties contract to swap interest payments for a predetermined period of time.1 The credit risk of a swap is less than that of a comparable debt contract because no changes hands and the payments under the swap are typically made on a net basis.2 Interest rate swaps first appeared in 1981, and since then the market has grown rapidly. One measure of the size of the market is the notional principal of the swap, that is the dollar amount on which the interest calculations