How do you value an interest rate swap?

Therefore, such swap contracts can be valued in terms of fixed-rate and floating-rate bonds. Let’s denote the annual fixed rate of the swap by c, the annual fixed amount by C, and the notional amount by N. Thus, the investment bank should pay c/4*N or C/4 each quarter and will receive the LIBOR rate multiplied by N.

What is interest rate swap with example?

Generally, the two parties in an interest rate swap are trading a fixed-rate and variable-interest rate. For example, one company may have a bond that pays the London Interbank Offered Rate (LIBOR), while the other party holds a bond that provides a fixed payment of 5%.

How do you calculate fixed rate swap?

It means that the fixed rate on the swap (let’s call it c) equals 1 minus the present value factor that applies to the last cash flow date of the swap divided by the sum of all the present value factors corresponding to all the swap dates.

How is swap value calculated?

Interest rate swap value is determined by summing up the present values of its cash flows, starting with determining the correct discount factor (df), calculated for each period (t) of the cash flow.

How is swap duration calculated?

Thus, the duration of the swap can be summarized as:

1. duration of swap=duration of long position−duration of short position.
2. 0.125−0.75=−0.625,
3. a negative duration. Effectively, when rates rise, his short position would be worth less. As a note of reference change in price=−duration⋅change in yield.

What is the swap fixed rate?

Swap rate denotes the fixed rate that a party to a swap contract requests in exchange for the obligation to pay a short-term rate, such as the Labor or Federal Funds rate. When the swap is entered, the fixed rate will be equal to the value of floating-rate payments, calculated from the agreed counter-value.

What is interest rate swap in simple terms?

An interest rate swap is a forward contract in which one stream of future interest payments is exchanged for another based on a specified principal amount. A swap can also involve the exchange of one type of floating-rate for another, which is called a basis swap.

What is the purpose of an interest rate swap?

Interest rate swaps usually involve the exchange of a fixed interest rate for a floating rate, or vice versa, to reduce or increase exposure to fluctuations in interest rates or to obtain a marginally lower interest rate than would have been possible without the swap.