An interest rate swap is a financial agreement between two parties to exchange interest rate payments on a specified principal amount. Typically, one party pays a fixed interest rate while the other pays a variable rate, often linked to a benchmark like the LIBOR. This allows both parties to manage their interest rate exposure according to their financial strategies. These swaps are commonly used by businesses and financial institutions to hedge against interest rate fluctuations or to optimize their debt management. By entering into an interest rate swap, organizations can align their cash flow needs with their financial goals, reducing risk and enhancing stability.