What is a swap? - MoneyWeek Investment Tutorials?

A swap is like trading one kind of candy for another, but instead of candy, people trade money or interest rates.

Imagine you and your friend both have piggy banks. You love getting 10 cents every day from your piggy bank, but your friend prefers getting 5 cents every day and then a big chunk of money once in a while. A swap lets you both agree to switch how much money you get, so you get the bigger chunks sometimes, and your friend gets the daily coins.

In real life, people use swaps when they want to change how much money they pay or receive over time. For example, a company might swap its fixed interest rate (like always paying 5% per year) with another company’s floating interest rate (which changes each year, like sometimes paying 4%, sometimes 6%).

It’s just like if you and your friend made a deal: “You give me 10 cents every day for a month, and I’ll give you 50 cents on the last day.” That way, both of you get what you want, one likes steady money, the other likes bigger rewards later. A swap is like trading one kind of candy for another, but instead of candy, people trade money or interest rates.

Imagine you and your friend both have piggy banks. You love getting 10 cents every day from your piggy bank, but your friend prefers getting 5 cents every day and then a big chunk of money once in a while. A swap lets you both agree to switch how much money you get, so you get the bigger chunks sometimes, and your friend gets the daily coins.