Swap Rate
AdvancedThe swap rate is the fixed interest rate in an interest rate swap that makes the swap worth zero at the start, balancing the expected value of the fixed payments against the expected floating payments.
In a standard interest rate swap, one party pays a fixed rate and the other pays a floating rate based on a benchmark such as SOFR or SONIA. The swap rate is the fixed rate agreed at the outset, set so that neither party gains or loses value when the swap starts.
For example, if the five-year swap rate is 3.8%, a company could enter a five-year swap paying 3.8% fixed and receiving the floating rate, effectively converting a floating-rate loan into a fixed-rate one.
Swap rates for different maturities form the swap curve, which is widely used as a benchmark for pricing loans, bonds and mortgages. Fixed mortgage rates in some countries, for example, move closely with swap rates.
Swap rates reflect market expectations of future floating rates and some credit and liquidity factors. The difference between the swap rate and the government bond yield of the same maturity is called the swap spread, which is watched as a measure of conditions in financial markets.
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