Module 1 · Chapter 2

The Swap, Line by Line

An interest rate swap is two streams of payments on the same dates, netted to one payment. Read beside the loan, it turns a floating cost into a fixed one.

≈ 14 min read 8-question test

In this chapter

  • How the swap's two payment streams become one payment each quarter
  • Why the loan and the swap together give Atlas a fixed cost
  • What to check in the swap's floor and its dates

2.1The swap in one paragraph

Under the swap, Atlas pays Pellhaven a fixed rate, and Pellhaven pays back the floating rate of the loan. Both rates apply to the same amount, the notional, on the same dates. On each date the two amounts are netted, and only the difference moves. The floating payment Atlas receives cancels the floating interest on its loan, so Atlas is left paying a fixed rate.

Key point

A swap does not make a loan cheaper. It makes the cost of the hedged part of the loan the same every quarter, whatever the floating rate does.

Also in this chapter

  1. The bank's first proposal
  2. Two payments on one date, netted to one
  3. The loan beside the swap: a cost that does not move
  4. Pay-fixed, and what the notional is not
  5. Why the fixed rate is 3%
  6. Which part of Pellhaven is on the other side
  7. The floor the swap does not have
  8. The swap's dates
  9. Your job

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