In this case, the Australian bank pays an Australian dollar interest rate to the swap counterparty and receives a US dollar interest rate in return. The Australian bank can use the interest payments from Australian borrowers to meet the interest payments to the swap counterparty, and it can pass the interest received from the swap counterparty onto its bondholders; 3.
At maturity of the swap, the Australian bank and its swap counterparty re-exchange principal amounts at the original exchange rate. The Australian bank can then repay its bond holders. [4] In effect, the Australian bank has converted its US dollar, US interest rate obligations into Australian dollar, Australian interest rate obligations.