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    Interest Rate Swap Example: Terms

    Uploaded by

    Vaidyanathan Ravichandran
    IRS Diagram1

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Interest Rate Swap Example: Terms

    Uploaded by

    Vaidyanathan Ravichandran
    20 views1 page
    IRS Diagram1

    Original Title

    IRS Diagram1

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    © © All Rights Reserved

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    PDF, TXT or read online from Scribd

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    IRS Diagram1

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    20 views1 page

    Interest Rate Swap Example: Terms

    Uploaded by

    Vaidyanathan Ravichandran
    IRS Diagram1

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 1

    Interest Rate Swap example

    Terms: A fixed-for-floating
    Fixed rate payer: Alfa Corp interest rate swap is
    Fixed rate: 5 percent, semiannual often referred to as a
    Floating rate payer: Strong Financial Corp “plain vanilla” swap
    Floating rate: 3-month USD Libor because it is the most
    commonly encountered
    Notional amount: US$ 100 million structure
    Maturity: 5 years

    Fixed rate payment


    (5% s.a.)
    Strong
    Alfa Corp
    Financial
    Floating rate payment
    (3-month Libor)

    • Alfa Corp agrees to pay 5.0% of $100 million on a semiannual basis to


    Strong Financial for the next five years
    – That is, Alfa will pay 2.5% of $100 million, or $2.5 million, twice a year
    • Strong Financial agrees to pay 3-month Libor (as a percent of the notional
    amount) on a quarterly basis to Alfa Corp for the next five years
    – That is, Strong will pay the 3-month Libor rate, divided by four and multiplied
    by the notional amount, four times per year
    • Example: If 3-month Libor is 2.4% on a reset date, Strong will be obligated to pay
    2.4%/4 = 0.6% of the notional amount, or $600,000.
    – Typically, the first floating rate payment is determined on the trade date
    • In practice, the above fractions used to determine payment obligations
    could differ according to the actual number of days in a period
    – Example: If there are 91 days in the relevant quarter and market convention is to
    use a 360-day year, the floating rate payment obligation in the above example
    will be (91/360) × 2.4% × $100,000,000 = $606,666.67.

    Copyright ®2004 International Swaps and Derivatives Association, Inc.

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