How Swaps Work and Why Issuers Use Them
How Swaps Work and Why Issuers Use Them
Introduction to Interest Rate Swaps California Debt and Investment Advisory Commission April 11, 2008
Swap Financial Group
Peter Shapiro 76 South Orange Avenue, Suite 6 South Orange, New Jersey 07079 973-378-5500
Agenda
z What can swaps do for you as a borrower?
z What risks do they pose? z How can you maximize benefits and
minimize risks?
Swap Financial Group
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What are swaps?
z Swaps are an alternative way to access the market for capital
z Major borrowers evaluate the swap market and the bond market side by side
z Typical swap:
? 2 parties ("counterparties")
? Exchange different forms of interest rates
? Defined period
? Usually, one party pays fixed and the other pays floating
Swap Financial Group
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Why swap?
z Savings: Provide substantially better economic results than those available in the conventional bond market
z Flexibility: Provide a solution to a financial problem which is not available in the conventional market
z Speed: Take advantage of market opportunity swiftly
Swap Financial Group
4
Swap structure (to fixed)
Issuer
Fixed Rate Floating Index
Swap Dealer
Bond Rate (Floating)
Bond Holder
Issuer pays Swap Fixed Rate minus the Difference between the two Floating Rates
Swap Financial Group
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