a swap in finance is when two parties exchange financial instruments such as interest rates, cash flows or derivatives and securities such as stocks or bonds. the most common financial swap is an interest rate swap, which is used to reduce borrowing cost for businesses by allowing them to swap interest rates. for example, fakely fabrications is a new company with unsure finances and a subsequently lower credit rating that ?. lenders will only offer it variable rate loans. thompson metalworks is an older, more established company than fakely with an excellent credit rating. both companies receive a loan for $5,000,000. however, fakely fabrications has a variable rate of 6%, whereas thompson has a fixed rate of 5%. the companies exchange interest rates through a swap bank for a predetermined length of time. fakely benefits from having a more stable interest rate than it's original loan and thus potentially boosting it's credit rating. thompson benefits because the recent interest rates on variable rate loans are dropped and they now are paying a lower interest rate on that $5,000,000 than they would have on their original loan. thus, both parties enjoy interest rates more in line with their financial objectives.