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What Is an Interest Rate Swap, and What Might Motivate

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Essay

What is an interest rate swap, and what might motivate a borrower to arrange for one with a bank?


Definitions:

Risk Premiums

Additional returns expected by an investor for taking on additional risk, over and above the risk-free rate of return.

Multifactor APT

Multifactor Arbitrage Pricing Theory, a model that describes the relationship between risk and expected return with multiple factors.

Beta

An indicator of the level of fluctuation, or inherent risk, of an asset or collection of assets relative to the overall market.

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