Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Absolute Rate

What it is:

In an interest rate swap, the absolute rate is the sum of the fixed rate component and the variable bank rate.

How it works (Example):

If two counterparties exchange a fixed interest rate and a variable interest rate as part of an interest rate swap based on a theoretical amount of principal, the absolute rate is the total of the fixed interest, or premium piece on top of the variable bank lending rate, or reference piece.

For example, if the fixed rate in a given interest rate swap is 5%, and the variable rate is 2%, then the absolute rate would be 5% + 2% = 7%.

Why it Matters:

The absolute rate represents the total yield accrued by both parties in an interest rate swap.