A floating-rate loan that is synthetically constructed using interest rate swaps. A debtor with a fixed-rate loan can convert this loan into a floating-rate loan in an attempt to hedge against foreseen decreases in interest rates. To that end, the debtor can enter the swap market to unlock the interest rate by concluding an interest rate swap in which he pays floating and receives fixed. The two fixed rates (the one the debtor pays on the debt and the one he receives from the swap) cancel each other out leaving the debtor with a floating rate that would help ease out his interest payments in an environment of downward moving rates. Needless to say, the life of the swap should be equal to the remaining life of the debt under conversion.
Of course, the life of the swap should be equal to the remaining life of the debt under conversion.
For a detailed example, see: constructing a synthetic floating-rate loan using swaps.
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