What are Interest Rate Swaps(IRS) | What happens in Interest Rate Swap ?

In the world of finance “Interest Rate Swap” is a financial technique used by financial institutions around the world. But we don’t realise that it is applicable to a common borrower like you and me. IRS is considered to be a complex financial arrangement but ironically it is barely a 5-10 minute simple read that can help you not only understand the process of an IRS but also use this in your next borrowing negotiation, thus helping you save a considerable amount of interest on your debt. Let's see how.

What is Interest Rate Swap with example? How does an interest rate swap work?

Let's break down the term first. ‘Interest Rate’ indicates that it talks about a rate of interest on a loan payable by any borrower (debtor) to the lender. ‘Swap' simply means to take something by giving something. So, IRS means that you as a borrower and payer of interest are going to come into an arrangement with another borrower whereby you will take up a fixed rate of interest payment on the debt in place of a floating rate of interest or vice versa. Now, this decision of yours will be completely based on your expectations of a rise or fall in interest rates in your country or with your bank or your lender. And an IRS can take place only if there are two borrowers who have different expectations about the future interest rates.

Interest Rate Swaps Example

So, suppose Mr. A has a loan of $100,000 from his bank with a fixed rate of interest on the debt @ 8%. And also imagine that Mr. B, another borrower, has borrowed $100,000 from his bank at a floating rate of interest @ LIBOR+2%. Suppose LIBOR is 5% now.So Mr. A is paying $8000 p.a. and Mr. B is paying $7000 p.a.

*LIBOR is a benchmark floating rate of interest
*(Floating rate of interest is a changing interest rate on your loan as and when your lender bank changes the rates due to economic changes)
*Mr. A & Mr. B need not necessarily be borrowers of same amounts but we have considered $100,000 for easy calculations.

From, fixed rate of interest and floating rate of interest, you must have learnt that at the time of taking a loan Mr. A has opted for a fixed interest rate on his loan because he assumes that the interest rates in the future are going to rise, while Mr. B expects a fall in the future interest rate and so opts for a floating interest rate.

Going forward, they both are unhappy with their interest rates i.e. Mr. A thinks that he was wrong about his assumption and Mr. B finds it a burden to pay an uncertainly changing interest rate as and when the bank changes its rate and so they decide to enter into an IRS agreement whereby Mr. A will be paying interest at a floating rate and Mr. B at a fixed rate after the Swap. So with this change Mr. A will be paying $7000 p.a. as interest when the interest rates are unchanged and Mr. B will be paying $8000 p.a. at all times.

If the LIBOR rises from 5% to 7% Mr. A will end up paying $9000 p.a and Mr. B interest remains same. Again if the LIBOR falls from 5% to 4% Mr. A ends up paying $6000 p.a. while Mr. B pays the same $8000 p.a. as he has shifted to a fixed interest rate regime after the Swap.

Thus, an IRS is a mutually benefiting agreement between 2 parties who are borrowers in some form and have an opposite expectation about the future interest rates or have an opposite risk taking ability.

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Difference between Fixed Rate of Interest & Floating Rate of interest?

Any borrower of money, either an individual or an institution is expected to pay an extra amount over and above the actual amount of loan to the lender at the time of repayment. The extra amount paid is called interest and the actual amount of loan is called principle. Interest to be paid by the borrower to the lender is calculated as a percentage of the principle. Hence, the term Interest Rate.

There are broadly two systems of interest rates charged by banks and financial institutions or any lender following an formal system of lending: The fixed rate of interest and floating rate of interest.

Here is a simple explanation for the two!

Fixed Rate of Interest

When a lender- a bank/ financial institution or an individual lends at a predefined and unchangeable rate of interest to be paid by the borrower on the principle (amount of loan) for the duration of loan irrespective of what happens to the interest rates in the country in the future, the rate of interest is said to be fixed.

Fixed rate of interest is a better choice for a lender if he expects a fall in the interest rates in the future. So, he would profit from receiving a higher rate of interest even when the general interest rate levels are down in the future. On the contrary, this would be beneficial for a borrower if he expects the rates to rise in the future. In this case, he would enjoy paying a lower fixed interest rate irrespective of the higher rates in the future.

Floating Rate of interest

Let's say that at the time of lending, the lender specifies the interest rate (to be paid by you) on your loan to be LIBOR+2%. This means that your interest rate is not fixed but rather variable. It may rise in the future if the LIBOR rises and fall if the LIBOR falls thus requiring you to pay more and less in the cases respectively. Thus, under this rate of interest the rates are completely dependent on the base – LIBOR.
Going by the same logic as above for a lender, floating rate of interest is ideal if he foresees a rise in the interest rates in the future but for a borrower it is rational to choose a floating rate of interest if he expects a fall in the interest rates in the future.

What are fixed and floating rates of interest?
Which is better, a fixed or variable rate loan?

Fixed vs Floating Interest Rate – Which Suits you The Best

From the above you may realise that you should opt for a fixed rate of interest for your loan if you are expecting the future rate of interest in your country to be higher than they are now and choose a floating rate of interest if you are expecting a fall in the interest rates in the future. The exact converse will be true in case of a lender.

You would know this if you're reading the newspapers or financial tabloids that discuss about the future plans of the Central Bank of your country or your lending bank/ institution. If there are signs that the Central Bank or your lending bank is likely to rise the rates of interest, you as a borrower should know that a fixed rate of interest is what you must choose today.

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How are Open Market Operations (OMO) and bond yields related?

OMO or open market operation is a quantitative financial tool by which a country’s Central Bank (The Federal Reserve System of the U.S.A., the European Union of the U.K., the Reserve Bank of India, the People’s Bank of China and all others) regulates the supply of money in its economy. A Central Bank’s main responsibility is to keep the inflation in check by managing the money supply, ensure that enough foreign reserves are maintained and the value of the currency is stable and not volatile in the constantly changing global relations and scenarios.

What is an OMO or Open Operation?

OMO means that a country’s Central Bank (central bank) involves in either purchase or sale of the government securities from and tothe banks operating in that country. The central bank performs this on behalf of the Government of that country. OMO takes place constantly between the banks and the central bank to keep the amount of money supply in the economy in check.

When does the central bank perform an OMO sale ad when does it perform an OMO purchase?


OMO sale-
If the central bank witnesses a rise in the inflation which means that more money is chasing fewer goods thus implying that there is money in the economy, the central bank announces an OMO sale i.e. the sale of securities in return for money from the banks. By this, the central bank has sucked out money from the banks which are the vehicles of money supply. Now, with quantity of money having become less, lending becomes difficult and so the lending rates rise. With this rise, deposit rates also rise in the banks.

OMO purchase-
If the economy is facing a shortage of money and the rate of inflation is below the required level it means that there is a difficulty in conducting day-to-day businesses in that country. So, the central bank steps in and decides an OMO purchase whereby it purchases the securities from the banks and gives them money. With this, the banks become money rich. Lending gets cheaper and easier. As a natural consequence deposit rates fall because the people are interested in borrowing at cheaper rates from banks and investing in business and infrastructure projects or simply any money churning activity.

So, how are bond prices related to all this? How does OMO affects bond yields?

Now, with higher deposit rates being offered by the banks after an OMO sale, the bond investors feel that the coupons they would receive from buying an older bond would be lesser attractive than the new deposit rates and as a result they are willing to pay lesser to buy the old bonds.Hence the price of the old bonds begins to fall with an increase in interest rates in the economy. Therefore interest rates and bond prices are inversely proportional. The exact reverse would happen in the case of an OMO purchase. Let’s understand this with a $100 investment comparison through this table.

Open Market Operations, Bond Yields, Inflation, Interest Rates, Fed, RBI
How are interest rates related to open market operations? 
It can be seen that after an OMO sale the bank offers a better return than the bond investment. And so the people agree to buy the bonds for lesser as they are getting lesser returns. Thus, an OMO sale brings the bond prices down and an OMO purchase pushes the bond prices up.

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10 Most Addictive Foods in the world

“Laughter is said to be the brightest where food is said to be the best.” Be it a choosy foodie who craves for his favourite foodstuff or the regular consumer , all of them have their personal choice of dishes that make their taste buds go mouth watering for their favourite dishes. An addict has cravings that get out of control. It could affect Physical and emotional happiness in the long run. An addict builds an “Illusion” of a state where one gets the pleasurable idea of eating even more turning out to be habitual. It is good to be in limits and restrict temptations as the end result might turn out to be bad.

My personal guide to top 10 food cravings that is healthy at the same time delightful covering a wide range from the morning breakfast to the evening meal.

1.  Oatmeal

It is a healthy breakfast food that nourishes one enabling them to work for hours together. It has low calories and is a high fiber diet that also stimulates body metabolism and digestion. One does not feel hungry for hours together as the body digests and absorbs it slowly. It also helps in reducing chances of health issues such as diabetes and high cholesterol. Thus it is the best suited dish for breakfast. Oatmeal can be classified to several types such as
  • Steel cut Oatmeal
  • Old Fashioned Oatmeal
  • Quick Cooking and Instant Oats.

2.  Chocolate

From a little toddler to a 90 year old. Chocolate is something one cannot resist temptation for. Dark Chocolate is said to be good for the heart compared to Milk Chocolate. One needs to thoroughly brush their teeth after having chocolate as the germ content builds up overnight. The best way to add a healthy twist to the meal with chocolate can be by making healthy chocolate dips or some dishes like
  • Black Forest Trifle-This is a new twist on the traditional multi-layered English dessert. It contains 16 ounces of no-sugar-added pitted cherries (frozen is fine) and it's low in calories, cholesterol, fat, and saturated fat.
  • Chocolate Tofu Mousse- made of soy milk and silken tofu, which reduces the fat content without sacrificing flavor.

3. Tasty choice of Salads

  • Fresh and tasty Macaroni Salad
  • Raw butternut squash and Kale salad
  • Carrot Avocado and Orange Salad
  • Lime Ginger and Parsnip particles made into a salad.
  • Carrot Parsley Salad

4. Choice Of Nuts

  • Maple Spiced Mixed nuts
  • Cinnamon Maple Mixed Nut Butter
  • Protein Breakfast Bars
  • Raspberry Coconut Paleo with walnuts

5. Burger

  • Cauliflower Veggie Burger
  • Grilled Portobello Mushroom Burger
  • Grilled Mango Peach Salsa Burger
  • Green Chile salsa burger

6. Cakes

Cakes can be baked with a twist with a great choice of sea food or healthy vegetables. Some of the healthy varieties include
  • Tuna Fish Cakes
  • Carrot Cake
  • Oyster Cake
  • Banana Cake

7. Chips

There are some healthy and much tastier varieties of chips other than Potato chips. Some of them are
  • Corn Chips
  • Banana Chips
  • Tapioca Chips
  • Carrot Chips
  • Butternut Squash Fries
It is good to consume them baked rather than frying them in oil.

8. Noodles

Noodles are something that all of us crave for here are some healthy options namely
  • Vegan Kale Pesto with Zucchini Noodles
  • Basil and Mint Squash Noodles
  • Vegan Creamy Ginger Coconut Kale Zucchini Spaghetti
  • Carrot Noodles with lime and spaghetti

9. Donuts

It is something that the American sheriff loves munching onto in the middle of the night. Some healthy choices include
  • Gluten free cake donut powdered with Cinnamon or Sugar
  • Cinnamon Sugar Donut Holes
  • Raspberry and Coconut glazed Donuts
  • Dark Chocolate Red Wine Donuts

10. Ice Cream

There is always room for ice cream. Without dessert a meal can never be complete. Healthy variants of ice creams are as follows
  • Chocolate Coconut milk Ice cream
  • 5 minute creamy mango ice cream
  • Raw chocolate Banana ice cream with strawberry toppings
  • Peach Almond Ice cream.

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Thanksgiving Day | Origin, History, Facts, Tradition,Controversy

Thanksgiving is hands down one of the most recognisable holidays in the world today. Many of us would think back fondly about that Friends episode on thanksgiving where everyone recollects their memories or Woody Allen’s magnificent film, “Hannah and her sisters” which revolves around thanksgiving.

So regardless of how, most of us are familiar with thanksgiving. But maybe this year you have been invited as a guest to a dinner and would like to dig a little deeper to understand the tradition better or you are just plain curious and want to know all there is about this festival. Well, fret not because we have you covered.

When did Thanksgiving originate?

So at some point you might have heard about the pilgrims but who were they? In 1620, a ship carrying around a 100 passengers left Plymouth, England for America in the hopes of a new life, a life free of religious persecution that they were facing back in England. After a treacherous journey they set up a village called, well, Plymouth in Massachusetts. The pilgrims found it tough to adapt to the new environments and many contracted diseases and died. This was when an Indian by the name of Squanto helped them. Squanto had been kidnapped by a British captain, sold to slavery in London and had then returned to America on board a ship on expedition. He taught them various skills and this helped them to successfully get a good harvest the next year. To commemorate this happy occasion, the Governor of the village, William Bradford invited the chiefs and other prominent Indians to a feast to thank them, although the term thanksgiving might not have been used.

And hence was born the tradition called Thanksgiving.

It is worth noting that there exist other stories on the origins and for the most part, scholars continue to argue about who first organized a Thanksgiving dinner but rest assured, as of now, the most widely accepted story continues to be this.

What is Thanksgiving in the USA? Thanksgiving in present form

In 1789, President George Washington issued a proclamation on the events of conclusion of the war and the ratification of the constitution to celebrate Thanksgiving Day. He asked his fellow Americans to express gratitude for the happy state of affairs.

Through much of the 19th century there was no uniform, Thanksgiving Day and the states that did celebrate it did so on various days. The seeds for having a uniform day for Thanksgiving were first sown by an author, Sarah Josepha Hale who campaigned relentlessly for 36 years for it to happen. Abraham Lincoln finally proclaimed that Thanksgiving be celebrated on the last Thursday of November and except for an infamous two years when it was pre-poned a week by FDR in the hopes of spurring sales but this was met with much opposition and so the dates were reverted back in 1941.

The dark history of Thanksgiving. Why many Americans don't celebrate it?

So was the celebration of Thanksgiving and the general climate at the time always genial and merry? Well, perhaps not. Take the events leading upto Thanksgiving 1637. The body of a white man was discovered and in retaliation the people burned villages of the Pequot nation down. It is estimated that 700 men, women and children died in this massacre. Merely days after this, the governor said, ”A day of thanksgiving. Thanking God that they had eliminated over 700 men, women and children.” Given this incident it isn’t tough to imagine why quite a few refuse to celebrate Thanksgiving.

So there you have it, a short primer on Thanksgiving. But where does that leave you and me? Should we go ahead and celebrate the festival, in a celebration of man’s desire to exist and succeed which belongs to the core of the American dream? Or are we to look at the many fault lines, lines which haven’t been filled in USA’s short history as a union.

If you were to ask me, I would say one needs to have a unbiased understanding of history. After all, as the old saying goes, “Ones who do not learn from history are bound to repeat it”. I also think that assembling as a group for a warm and jovial time isn’t a crime. So if you are indeed going to celebrate Thanksgiving, whilst saying a prayer to the pilgrims also say a prayer to all those who had to tragically give up their lives, for no apparent reason but because of the color of their skin.

HAPPY THANKSGIVINGs!


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