Swaps

A Swap is a simultaneous buying
and selling of the same security or obligation.
Perhaps the best-known Swap occurs
when two parties exchange interest payments
based on an identical principal amount,
called the "notional principal amount."

Think of an interest rate Swap as follows:
Party A holds a 10-year $10,000 home equity loan
that has a fixed interest rate of 7 percent,
and Party B holds a 10-year $10,000 home equity
loan that has an adjustable interest rate that
will change over the "life" of the mortgage.
If Party A and Party B were to exchange
interest rate payments on their otherwise
identical mortgages, they would have
engaged in an interest rate Swap.