Interest Rate Swap

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Ernest Seow

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Dear all,
I have a question pertaining to interest rate swap. Consider the following hypothetical example:
A has a floating-rate liability and want a fixed-rate exposure.
B has a fixed-rate liability and want a floating-rate exposure.
Both of them enter into a swap contract. Assumingly for simplicty sake, the swap is 3 years and the payment period is 1 year- annual pay $1,000 interest rate swap.The fixed rate is 5% and current 360 days LIBOR is 6%.
Question: At end of Year 1, what is the net interest payment; and which party pay this amount?
My thoughts:
The net interest payment will be: (6-5)% * $1,000= $10
and this $10 will be paid by A to B.
Am I right?
Thank you.
Cheers,
Ernest
 
A pays a floating rate but wants to pay a fixed rate; A wants to receive floating and pay fixed in the swap.
B pays a fixed rate but wants to pay a floating rate; B wants to receive fixed and pay floating in the swap.
As the floating rate is higher than the fixed rate, B pays A.
 
S2000magician wrote:
A pays a floating rate but wants to pay a fixed rate; A wants to receive floating and pay fixed in the swap.
B pays a fixed rate but wants to pay a floating rate; B wants to receive fixed and pay floating in the swap.
As the floating rate is higher than the fixed rate, B pays A.
Click to expand...
Thank you S2000magician.
 
During the Interest rate swap one party pays fixed and other party racieve fixed and vice versa. So the above solution seems right. At the end of the period the notional principal is exchanged again.
 
edupristine wrote:During the Interest rate swap one party pays fixed and other party racieve fixed and vice versa. So the above solution seems right. At the end of the period the notional principal is exchanged again.
Click to expand...
In a single-currency swap the notional principle is never exchanged; not at the beginning, nor at the end.
 
In this example B pays A . Because B wants floating rate exposure and A wants fixed rate exposure.
 
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