A plain vanilla interest rate swap:
A)requires the fixed-rate borrower to make fixed-rate swap payments
B)is an arrangement that modifies a borrower's obligation to their lender
C)is the exchange of interest and principal payments
D)requires a floating-interest rate payment calculated using the 'swap rate'
E)is settled by a swap payment which is the difference between the floating- and fixed-rate interest payments calculated on an agreed notional principal.

Question

Quizplus · Accepted Answer

A plain vanilla interest rate swap involves the exchange of fixed-rate and floating-rate interest payments, calculated on an agreed notional principal. The swap payment is the difference between the two payments and is settled periodically. The fixed-rate payer makes fixed-rate swap payments, while the floating-rate payer makes payments calculated using the swap rate. The arrangement does not modify the obligations of the borrower to their lender.

A Plain Vanilla Interest Rate Swap