Interest Rate Swap

Interest Rate Swap is intended for:

Individuals as well as legal entities including municipalities, nationals as well foreigners, requesting hedging of the interest rate risk resulting from a possible - from the client's point of view - negative development of the given interest rate.

Characteristics of Interest Rate Swap:

Interest rate swap (IRS) is an agreement on an exchange of cash flows denominated in one currency, that are derived from a fixed or a variable base.

Party A undertakes to pay a party B agreed fixed interest on an agreed principal, for an agreed period, as of agreed due dates. At the same time the party B undertakes to pay the party A agreed float interest on the agreed principal, for the agreed period, as of agreed due dates.

From a legal viewpoint, the swap does not result in any change of the original creditor or debtor relations of the parties.

This means that the subjects of a swap transaction remain fully liable for the fulfillment of their respective interest-related obligations that are the subject of the swap (or, respectively, remain creditors of interest receivables).

The float interest rate is fixed and compared with the fix interest rate two business days before the commencement of particular interest periods.

The settlement is performed by one cash flow on the due dates (ends) of the particular interest periods.

The payment is made by the party, the swap interest payment of which has a higher value, by netting, i.e. by the settlement of the difference between the two exchanged interest payments.

During the existence of an interest rate swap, the parties may agree on its cancellation.

Upon this cancellation, the market value of the interest rate swap is settled by a single payment and by the cancellation of the entire transaction and all future liabilities. Interest paid before the cancellation date of the swap is not refunded.

As of the date of the interest rate swap cancellation, the parties agree on a price for which both of them are willing to rescind the transaction.

The party in disadvantageous (losing) position pays to the other party the agreed amount (the market price of the swap) with the spot value date and cancels the swap transaction.

Unless the swap is cancelled as of the date of settlement of interest payments, the difference between the settled interest expense and interest yield of the cancelled swap, which has not yet been settled, will be included in the market price of the swap.

The deal is always concluded with the Sales dealer by phone.

The client receives deal confirmation containing the agreed parameters of the deal.

Product modifications

Amortized IRS

Step up IRS

Risks

The potential for a profit or a loss from interest rate transactions is influenced by the movement of interest rates.

A possible loss is caused by the fact that the client finds himself/herself, within the given interest period, in the disadvantageous position, meaning the swap payment paid by him/her is higher that the payment paid by the bank. In this case, the client pays the difference of these two payments to the bank.

Nevertheless, if the deal was concluded as hedging, the client considers this loss as a cost for hedging. The hedging protects the client against such a significant change of the interest rates that could cause him/her serious financial problems.

Benefits of Interest Rate Sap:

Interest Rate Swap allows you to:

How can you obtain an Interest Rate Swap?

If you are interested in gaining more information about this product or would like to arrange it directly, visit any branch of KB or call free of charge on the KB Info line 800 111 055.

Related information:

 Investment Banking KB