abhishreshthaa
Abhijeet S
Interest Rate Swaps:
A standard fixed-to-floating interest rate swap, known in the market jargon as a plain vanilla coupon swap (also referred to as “exchange of borrowings”) is an agreement between two parties in which each contracts to make payments to the other on particular dates in the future till a specified termination date.
One party, known as the fixed ratepayer, makes fixed payments all of which are determined at the outset. The other party known as the floating ratepayer will make payments the size of which depends upon the future evolution of a specified interest rate index (such as the 6-month LIBOR). The key feature of this is:
The Notional Principal:
The fixed and floating payments are calculated if they were interest payments on a specified amount borrowed or lent.
It is notional because the parties do not exchange this amount at any time; it is only used to compute the sequence of payments. In a standard swap the notional principal remains constant through the life of the swap.
A standard fixed-to-floating interest rate swap, known in the market jargon as a plain vanilla coupon swap (also referred to as “exchange of borrowings”) is an agreement between two parties in which each contracts to make payments to the other on particular dates in the future till a specified termination date.
One party, known as the fixed ratepayer, makes fixed payments all of which are determined at the outset. The other party known as the floating ratepayer will make payments the size of which depends upon the future evolution of a specified interest rate index (such as the 6-month LIBOR). The key feature of this is:
The Notional Principal:
The fixed and floating payments are calculated if they were interest payments on a specified amount borrowed or lent.
It is notional because the parties do not exchange this amount at any time; it is only used to compute the sequence of payments. In a standard swap the notional principal remains constant through the life of the swap.