Interest Rate Swap (IRS)
Quantitative Finance glossary · Quantitative Finance
Definition
OTC contract exchanging fixed-rate cash flows for floating-rate cash flows on a notional principal; the floating leg typically references SOFR (post-LIBOR transition).
Interest Rate Swap (IRS) in plain English
An interest rate swap is a private deal where two parties trade interest payments: one pays a locked-in fixed rate, the other pays a rate that floats up and down with the market. Think of two friends with loans — one hates surprises and wants predictable payments, the other is betting rates will fall — so they agree to cover each other's interest, effectively swapping their payment styles. No one hands over the big loan amount itself (called the 'notional'); it's just used to calculate the interest that actually changes hands. The floating side is usually tied to SOFR, a standard U.S. benchmark rate that replaced the older LIBOR.
Also called: IRS
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