Interest Rate Risk Management

While strategies are custom developed to meet your specific needs, here are three common products:

Interest Rate Swap

An interest rate swap is a contractual arrangement between two counter-parties who agree to exchange interest payments on a defined principal amount for a fixed period of time. In an interest rate swap, the principal amount is never exchanged and is therefore referred to as a “notional” principal amount or simply “notional.” Interest rate swaps do not generate new funding; rather, they convert one interest rate basis to another rate basis (e.g. from floating to fixed or from fixed to floating).

Interest Rate Cap

An interest rate cap allows a client to place a maximum rate of interest on its floating rate debt. Unlike an interest rate swap, which locks in a fixed rate, a company pays a premium on a cap to protect itself against a dramatic rise in interest rates.

Interest Rate Collar

A business may wish to reduce the cost of its interest rate cap by selling an interest rate floor to Old National. The simultaneous buying of a cap at one strike level while selling a floor at a lower strike level is called a collar. In fact, the cap and floor levels can be set in such a way as to make the collar "costless."