An exchange of cash flows in which one counterparty makes payments based on a fixed interest rate, the other counterparty makes payments based on a floating interest rate and the counterparty paying the fixed interest rate has the right to end the swap before it matures.
An investor might choose a callable swap if interest rates are expected to change in a way that would adversely affect the fixed rate payer.
The additional features of a callable swap make it more expensive than a plain vanilla interest rate swap - the fixed rate payer will pay a higher interest rate and possibly might have to pay additional funds to purchase the option. The opposite of a callable swap is a putable swap, which allows the floating interest rate payer to end the swap early.
Investment dictionary. Academic. 2012.
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