Interest rate swap, also known as "interest rate swap", refers to the debtor's operation of converting his own floating interest rate debt into fixed interest rate debt or converting fixed interest rate debt into floating interest rate debt according to the interest rate trend of the international capital market. It can be used to reduce the cost of borrowing, or to avoid the risks caused by interest rate fluctuations, and at the same time, it can fix its own marginal profits.

Product functions and characteristics

Interest rate swap is a commonly used debt hedging tool to manage medium and long-term interest rate risks. Customers can convert assets or liabilities in one interest rate form into assets or liabilities in another interest rate form through interest rate swap transactions. Generally speaking, when the interest rate is bullish, it is ideal to convert floating interest rate bonds into fixed interest rates, while when the interest rate is bearish, it is better to convert fixed interest rates into floating interest rates. So as to avoid interest rate risk, reduce the cost of debt, and at the same time, it can be used to fix its own marginal profit and facilitate debt management.

Interest rates can take many forms, and any two different forms can be converted into each other through interest rate swaps, among which the most commonly used interest rate swaps are between fixed interest rates and floating interest rates.

Case:

A company has a US dollar loan with a term of 10 years, from 1997 to March 6, 2007. Interest is paid every six months, and the interest rate is USD 6 months LIBOR+70 basis points. The company believes that the interest rate of the US dollar will rise in the next decade, and if you hold floating interest rate debt, the interest burden will become heavier and heavier. At the same time, due to the fluctuation of interest rate, the company cannot accurately predict the interest burden of loans, which brings difficulties to cost planning and control. Therefore, the company hopes to convert this loan into a US dollar fixed interest rate loan. At this time, the company can conduct interest rate swap transactions with the Bank of China.

After the interest rate swap, the company will pay the bank a fixed interest rate of 7.320% on each interest payment date, and the six-month LIBOR+70 basis points of the US dollar will be used to pay the original loan interest. In this way, the company will fix the debt cost in the next 10 year at the level of 7.320% at one time, thus achieving the purpose of managing its debt interest rate risk.

The form of interest rate swap is very flexible and can be tailored according to the actual situation of customers' cash flow. It can be used for existing debt, newly borrowed debt and long-term value.

Some precautions:

L Term and cost of interest rate swap: The longest term of interest rate swap of USD, JPY and major foreign currencies can reach 10 year. Interest rate swap only needs to pay a floating (or fixed) interest rate with the bank on each interest payment date, and there is no other fee.

L Debt and assets are actually two sides of the same coin, so debt hedging tools are also asset hedging tools. Interest rate swap can also be applied to the income management of assets. When the interest rate is bearish, assets with floating interest rate are converted into assets with fixed interest rate. Converting assets with fixed interest rate into assets with floating interest rate when interest rate is bullish can also achieve the purpose of controlling interest rate risk and increasing income.