how do interest rate swaps work 
an interest rate swap is a financial agreement between two parties it is a forward contract which means both parties pay each other interest at specified intervals in the future these swaps are based on a predetermined dollar value called the notional principal amount this value is theoretical which means that it never changes hands rather the two parties only pay each other the agreed upon interest companies and financial institutions trade interest rate swaps to mitigate risk hedge against loss and manage credit risk 