What is the Absolute Rate?
In an interest rate swap, the absolute rate is the sum of the fixed rate component and the variable bank rate.
How Does the Absolute Rate Work?
If two counterparties exchange a fixed interest rate and a variable interest rate as part of an interest rate swap based on a theoretical amount of principal, the absolute rate is the total of the fixed interest, or premium piece on top of the variable bank lending rate, or reference piece.
For example, if the fixed rate in a given interest rate swap is 5%, and the variable rate is 2%, then the absolute rate would be 5% + 2% = 7%.
Why Does the Absolute Rate Matter?
The absolute rate represents the total yield accrued by both parties in an interest rate swap.
