July 2011
Beginner
288 pages
7h 22m
English
Content preview from BOND MATH: The Theory Behind the FormulasBecome an O’Reilly member and get unlimited access to this title plus top books and audiobooks from O’Reilly and nearly 200 top publishers, thousands of courses curated by job role, 150+ live events each month,
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Pricing an Interest Rate Swap
Figure 8.1 portrays an interest rate swap in the customary box-and-arrow format. Party A and Party B agree to exchange an interest rate that varies from period to period, specifically 3-month LIBOR (hence, it's the “floating” rate), for a fixed rate of 3.40% on a quarterly basis for two years. Net settlement payments are in arrears, meaning 3-month LIBOR is determined at the beginning of the period and then a payment for the rate difference, times the notional principal, times the fraction of the year, is made at the end of the period. Importantly, there is no exchange of principal at initiation or at maturity. That's why the principal is merely “notional”—it's the scale factor for the transaction.
Party A, the fixed-rate ...
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