Definition
The term accreting main switch refers to some derivative which permits the notional principal of that loan to raise predictably within the life span of this agreement. An accreting main exchange is normally utilized with a borrower who really needs additional funds as time passes, but wants to lock their financing cost ahead of their drawdown.
Explanation
Also called an buildup exchange, this monetary derivative calls for a arrangement where counter parties agree that the projected principal amount will expand overtime. Such a swap is used to invest in large construction projects.
For instance, like a construction job progresses, the debtor ‘s dependence on extra financing increases. As a way to get a handle on expenseslock into their cost of borrowing, the construction job will come right in a accreting chief swap. The full loan might be broken up into tranches. As fresh capital are essential to start another period of this job, the borrower brings additional funds out of the agreement and also the main of this loan develops.
Since large construction projects can take several years to finish, the accreting main swap permits the borrower to lock into their own cost of money also insulate themselves out of interest rate risk.
