Moneyzine
Contents
/Investment Guides /Accreting Principal Swap (Accumulation Swap)

Accreting Principal Swap (Accumulation Swap)

Moneyzine Editor
Author: 
Moneyzine Editor
1 mins
January 3rd, 2024
Advertiser Disclosure
Accreting Principal Swap (Accumulation Swap)

Definition

The term accreting principal swap refers to a derivative that allows the notional principal of a loan to increase predictably over the life of the agreement. An accreting principal swap is typically used by a borrower that needs additional funds over time, but prefers to lock in their financing cost in advance of the draw down.

Explanation

Also known as an accumulation swap, this financial derivative involves an arrangement whereby counterparties agree the estimated principal amount will grow over time. This type of swap is oftentimes used to fund large construction projects. in fact, accumulation swap involves exchanging cash flows based on the performance of an underlying asset, while on the other hand, swap-free forex brokersoffer trading accounts without overnight interest fees.

For example, as a construction project progresses, the borrower's need for additional funding will increase. In order to control expenses, and lock in their cost of borrowing, the construction project will enter into an accreting principal swap. The entire loan may be divided into tranches. As new funds are needed to begin the next phase of the project, the borrower draws additional funds from the agreement and the principal of the loan grows.

Since large construction projects can often take many years to complete, the accreting principal swap allows the borrower to lock in their cost of money and insulate themselves from interest rate risk.

Related Terms

  • Liabilities
    The financial accounting term liability is used to describe the debt of a corporation that results from a transaction involving the transfer of an asset or the provision of a service. Liabilities are reported on a company's balance sheet.
    Moneyzine Editor
    Moneyzine Editor
    January 23rd, 2024
  • Interest Expense
    The financial accounting term interest expense is used to describe the interest payments that have come due on amounts borrowed by a company or an individual. Interest expense will appear as a line item on a company's income statement.
    Moneyzine Editor
    Moneyzine Editor
    January 22nd, 2024
  • Deep Discount Bonds
    The financial accounting term deep discount bonds refers to indentures that are sold at a price significantly lower than face value, typically 20% or more. Deep discount bonds can also include zero coupon bonds, which do not pay a rate of interest to the holder.
    Moneyzine Editor
    Moneyzine Editor
    January 15th, 2024
  • Income Bonds
    The financial accounting term income bond refers to a debt security that provides for periodic coupon payments if the company has sufficient earnings. Interest payments to holders of these securities are not guaranteed. Income bonds are typically issued by companies that are struggling financially.
    Moneyzine Editor
    Moneyzine Editor
    January 19th, 2024
  • General Obligation Bonds
    The term general obligation bond is used to describe a debt security issued by state or local governments. Unlike a revenue bond, which is secured by a specific income-generating entity, a general obligation bond is secured by the municipality's pledge to use all legally available means, specifically tax revenues, to repay this debt.
    Moneyzine Editor
    Moneyzine Editor
    January 19th, 2024

Related Content

  • Biden Or Trump: Who Is Better For The Economy And Stocks?
    Yup. This is one of those articles. It's an election year, and here in the U.S., we get to decide which old dude who’s been alive long enough to remember when there were only 48 states in the U.S. will be the leader of the free world.
    March 19th, 2024
  • When it comes to strategic business planning, accounting is front and center, shaping the course of action. At least it should be.
    March 14th, 2024
  • DRIP Brokers: Best Brokers for Dividend Investing for April 2024
    Reinvesting dividends could mean compound growth for your portfolio. But reinvesting them manually can be a hassle. This is why you could benefit from a dividend reinvestment plan (DRIP).
    March 12th, 2024
  • How To Invest in Real Estate Without Becoming a Landlord
    We all know that in order to build wealth and prepare for retirement, investing is the key. However, it can be hard to figure out what to invest in and how to put your money to good use. One of the most talked about ways to build wealth is owning property and being a landlord to bring in passive income. But what if you don’t want to do that? You can still invest in real estate!
    March 6th, 2024
  • Investing In Nature: The Closest You'll Get To Your Money Growing On Trees
    ESG (Environmental, Social, and Governance) has become a polluted word for many traders and investors - but that doesn't mean it's going completely away. Nor does that mean you can't profit from nature or sustainable practices. But there are some opportunities in the regenerative ag, conservation, and green real estate spaces.
    February 29th, 2024

Contributors

Moneyzine 2024. All Rights Reserved.