Identify the correct statement regarding a plain vanilla swap.
A)Interest and principal payments are exchanged at the beginning of the swap.
B)The net settlement is a single payment at the end of the swap term.
C)The fixed-rate payments are set equal to the expected floating-rate payments.
D)The flow of payments between parties may change direction during the life of the swap.
E)There is no default risk involved in a plain vanilla swap.

Question

Quizplus · Accepted Answer

In a plain vanilla swap, typically involving interest rates, the flow of payments can indeed change direction over the life of the swap. This happens as the underlying rates that determine the payments (e.g., LIBOR for floating rates) fluctuate over time.

Identify the Correct Statement Regarding a Plain Vanilla Swap