Mae sress e s
Credit default swap
CDS (NO DEFAULT)
Protection
Buyer
Protection
Qarterly payments of X
basis points per year
Seller
Reference Bond
CDS (DEFAULT)
Protection
Par value of bond
Buyer
Delivery af bond
Protection
Seller
Reference Bond
Mare
SOFR
SOR
Co A
Swap Bank
Co B
0.5% Profit
Notional
7%
$5 million
Definitions
the
valtue of
the
unde
SOFR
adewaM
Floatine interest rate an interest rate that is+1%6
$5 million
aable and may change periodically
leg-one side of a swaptrade (foed feg
or
ti
Payertypically refers to the payer of the
Bank A
Rate on
Foed
an interest rate swap
Rcehver typicaly refees to the raceiver of
the Fed e
Bank A offers Co A
two choices of loan:
5/m ot Fixed 7%
Or
Bank B
on n
Maturity 1he date on wich the prncipal
applicable) and final interest coupon are paid.
Payment frequency-the number of interest
payments per yeare8 Quartet, monthiy
otnantiaintert eio
Exxaniples include AcVS0, SU 360 etc.
Bank B offers Co B
two choices of loan:
SSm at Fixed 10%
Or
S5m at oiaDie
Interest Rate
Swap Example
Julia
Simone
Interest Rate Swap
Fixed interest rote 2%
Flooting interest rate LIBOR 15%
A swap
onily occurs If one party hos o fixed rote
hile the other hos o "flooting rote". Each porty beleves
they con get o lower interest rate by suwopping. Thot is the
only reoson Julla and Simone would "suop" their
Interest rotes from the banks in thls scenario.
Flooting interest rate
LIBOR 15%
Fixed interest rate
2%