Fixed-rate payer versus floating-rate payer
| Party | Pays | Receives | Benefits When |
|---|---|---|---|
| Fixed-rate payer | Fixed rate (e.g., 4%) | Floating rate (e.g., SOFR) | Rates rise (receives more floating) |
| Floating-rate payer | Floating rate (SOFR) | Fixed rate (4%) | Rates fall (pays less floating) |
The swap net-payment formula
Net Payment = (Fixed Rate − Floating Rate) × Notional × Day Fraction
Converting floating-rate debt to fixed
Swaps are how companies manage interest rate risk. A company with floating-rate debt can enter a swap to pay fixed — effectively converting their floating-rate loan into a fixed-rate loan without refinancing.
Comparing a locked fixed rate to SOFR
Check current SOFR rates in the Macro section. If a company locked in a 3.5% fixed rate when SOFR was 3%, and SOFR later rises to 5%, they’re saving 1.5% on their notional annually.
Calculating the swap's net benefit
A company with $500M in floating-rate debt enters a swap paying 4% fixed and receiving SOFR (assume 5.3%). What’s the net annual benefit?
Why the swap market is so large
Net cash flow on a pay-fixed swap
Interest rate swap: a company pays fixed 4%, receives floating (SOFR) on $100M notional for 5 years. Current SOFR: 5.5%. What's their net monthly cash flow?
Check your understanding
Sit with the ideas.
A company with $50 million in floating-rate debt (SOFR + 1.5%) is worried about rising rates. It enters a swap to pay 4.0% fixed and receive SOFR. What is its new effective borrowing cost?
Why: