Question
What property of a newly initiated swap makes its value zero at inception?
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Answer
The fixed swap rate is set so the contract has zero initial value.
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Question
Why can an interest rate swap be viewed as a series of forward rate agreements?
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Answer
Because it exchanges cash flows at multiple future dates like forwards.
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Question
In a plain-vanilla interest rate swap, what does the fixed-rate payer receive in return?
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Answer
Floating-rate cash flows on the notional principal.
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Question
Why would a company with floating-rate debt enter a pay-fixed, receive-floating swap?
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Answer
To stabilize interest expense by effectively locking in a fixed rate.
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