Interest rate swap (IRS) has been an essential tool for fixed income investors, corporate treasurers, risk managers, and banks. The IRS market started decades ago as a way for corporations to manage interest cost on their debt obligations. It has now become one of the most useful and liquid derivatives markets in the world. The use of IRS for hedging, speculating, and managing risk has made it one of the commonly used derivative instruments in the financial services industry. Interest rate swaps are commonly traded over the counter customized contracts between institutional counterparties.
IRS is of great use to bond fund managers. It helps fixed income fund managers to manage duration risk caused by fluctuation in interest rates. By altering rates exposure using swaps, fund managers can optimize their exposure to changes in the shape of the curve. IRS is also a good substitute for less traded/illiquid bonds.