In a vanilla interest rate swap:
A) the amounts payable between parties depend on a specified principal that is exchanged at the outset.
B) one party pays another party an amount calculated according to a floating interest rate on a notional principal, in exchange for an amount calculated on the basis of a fixed interest rate.
C) only interest flows are exchanged until maturity, when the principal is exchanged according to the difference in the interest rates over the lifetime of the swap.
D) the amounts payable between parties depends on a specified principal that is exchanged at the beginning and at the end.

Question

Quizplus · Accepted Answer

In a vanilla interest rate swap, one party pays another party an amount calculated according to a floating interest rate on a notional principal, in exchange for an amount calculated on the basis of a fixed interest rate. The amounts payable between the parties are based on the notional amount and the difference between the fixed and floating interest rates. Only interest payments are exchanged, and the notional principal is not actually exchanged at any point during the swap. Therefore, choices A, C, and D are incorrect.

In a Vanilla Interest Rate Swap