## 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.