An interest-rate swap in which a fixed rate is exchanged for a floating rate, where the fixed payment stream is usually provided by an asset (in particular, a fixed-income instrument like bonds and notes) held by the fixed rate payer. In case the swap rate differs from the asset payout (a bond coupon, for instance), the party with the less favorable standing should pay the other party a one-time principal payment at inception to make up for such a difference. Broadly speaking, asset-based swaps transform the character of the end user’s assets, unlike most swaps that transform the character of the end user’s liabilities.
Derivatives
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