Amortizing Swap

An amortizing swap involves two parties making a deal where one pays a fixed rate of interest and the other pays a floating rate of interest (another way to say it is a variable interest rate). Both payments are based on a set principal amount that decreases over time, such as a mortgage.

Let’s say Joe Investor buys a property with a variable interest rate tied to the short-term Treasury rate. Perhaps he could only qualify for this variable rate. He rents out the property for a fixed monthly payment. To protect himself from rising interest rates that would cause his mortgage payments to exceed his rent revenue, Joe makes a swap agreement with Alice Investor where he will exchange his variable rate for a fixed rate, avoiding most of the risk.

One thing to note: Joe and Jill don't trade assets. They just trade the interest payments for their assets. So a salary swap might involve you switching salaries with someone, while you both continue to perform the same jobs as before. Jobs don't change, just salaries. That's a swap.