In a vanilla interest rate swap:Group of answer choicesthe amounts payable between parties depends on a specified principal that is exchanged at the beginning and at the end.the amounts payable between parties depend on a specified principal that is exchanged at the outset.only interest flows are exchanged until maturity, when the principal is exchanged according to the difference in the interest rates over the lifetime of the swap.one party pays another party an amount calculated according to a floating interest rate on a notional principal, in exchange for an amount calculated on the basis of a fixed interest rate.
Question
In a vanilla interest rate swap:Group of answer choicesthe amounts payable between parties depends on a specified principal that is exchanged at the beginning and at the end.the amounts payable between parties depend on a specified principal that is exchanged at the outset.only interest flows are exchanged until maturity, when the principal is exchanged according to the difference in the interest rates over the lifetime of the swap.one party pays another party an amount calculated according to a floating interest rate on a notional principal, in exchange for an amount calculated on the basis of a fixed interest rate.
Solution
In a vanilla interest rate swap, one party pays another party an amount calculated according to a floating interest rate on a notional principal, in exchange for an amount calculated on the basis of a fixed interest rate.
Here's a step-by-step explanation:
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Two parties agree to swap interest payments. One party will pay interest on a notional principal amount at a fixed rate, and the other party will pay interest on the same notional principal amount at a floating rate.
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The notional principal amount is the predetermined dollar amount on which the exchanged interest payments are based. It's called 'notional' because it doesn't actually change hands.
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The fixed rate is agreed upon at the start of the contract and remains constant throughout the life of the swap.
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The floating rate is usually tied to a reference rate such as LIBOR and changes periodically as the reference rate changes.
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At each payment date, the party paying the fixed rate pays the other party the fixed rate times the notional principal amount. The party paying the floating rate pays the other party the floating rate times the notional principal amount.
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The net payment is the difference between the fixed and floating payments. The party that owes the larger payment pays the other party the net amount.
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This process continues until the swap matures. At maturity, no principal is exchanged, only the final net interest payment.
Similar Questions
What is an interest rate swap, and how does it function as a financial instrument?
A semi-annual pay interest rate swap where the fixed rate is 5% (with semi-annual compounding) has a remaining life of ten months. The six-month LIBOR rate observed two months ago was 4.85% with semi-annual compounding. Today’s four and ten month zero rates are 5.3% and 5.8%, respectively, per annum continuously compounded. The swap has a principal value of $1,000,000. a) For this interest rate swap, the party receiving a fixed rate of interest is the (swap buyer or swap seller), and effectively holds (a short position or a long position) in a fixed-rate bond and (a short position or a long position) in a floating-rate bond. b) The value of the interest rate swap to the buyer is ? . Note: Please provide your answer as an integer without commas in the format of xxxxxx (for example, if the answer is $123,456.00, type in 123456; if the answer is -$123,456.00, type in -123456).
A swap deal is executed by:Select one:a.Settling the difference int he ratesb.Actual delivery of currenciesc.Entering into another swap deald.None of the above
In a fixed-for-floating currency swap, principal and fixed interest payments in one currency are swapped for the principal and floating rate interest payments in another currency. Select one: True False
1 pointChange in the risk profile of the counterparties during the life of the Interest Rate Swap could __________ the fixed rate - floating rate advantage and hence put the Interest Swap Structure in __________. facilitate; order facilitate; disarray alter; disarray alter; order
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