Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
38 Cards in this Set
- Front
- Back
What is an interest rate swap?
|
an agreement in which two parties agree to exchange periodic interest payments
|
|
What is the notional principal amount?
|
the dollar principal amount upon which the interest payments in an interest rate swap or interest rate agreement are based
|
|
What is the fixed-rate payer?
|
in the most common form of interest rate swap, the party that pays the other fixed interest payments at designated dates for the life of the contract; if interest rates rise, fixed rate payer will realize a profit
|
|
What is the floating-rate payer?
|
party that agrees to make interest rate payments that float with some reference interest rate; if interest rates rise, the floating-rate payer will realize a loss
|
|
What are the 2 ways to interpret an interest rate swap?
|
1. as a package of forward/futures contracts; except interest rate swaps have longer maturities; more liquid than forward contracts; more efficient, forward contracts would have to be negotiated separately
2. as a package of cash flows from buying and selling cash market instruments |
|
What are plain vanilla swaps?
|
generic interest rate swap in which the counterparties exchange a fixed rate for a floating rate, and the notional principal amount is the same over the life of the swap
|
|
What is an asset swap?
|
the use of an interest rate swap to change the cash flow characteristics of assets
|
|
What is a liability swap?
|
the use of an interest rate swap to change the cash flow characteristics of liabilities
|
|
What are the two important functions of interest rate swaps?
|
1. it can change the risk of a financial position by altering the cash flow characteristics of assets or liabilities
2. it also can be used to enhance returns |
|
What is the swap spread?
|
the difference between the swap's fixed rate and the rate on a Treasury whose maturity matches the swap's maturity
|
|
What factors influence swap spreads?
|
1. credit spreads
2. the level and shape of the Treasury yield curve 3. the relative supply of fixed- and floating-rate payers in the interest rate swap market 4. the level of asset-based swap activity 5. technical factors that affect swap dealers |
|
What are the 3 general types of transactions in the secondary market for swaps?
|
1. a swap reversal
2. a swap sale (or assignment) 3. a swap buy-back (or close-out or cancellation) |
|
What is a swap reversal?
|
one party wants out of the transaction; arranges for an additional swap with maturity equal to the time remaining for the original swap, reference rate and notional priniciple amount are the same; risk is that reversing party is now liable to two parties instead of one and takes on more default risk
|
|
What is a swap sale or swap assignment?
|
party that wishes to close out finds another party willing to accept its obligations under the swap; none of the risk of swap reversal; counterparty must accept- new party must have a comparable credit rating to the terminating party
|
|
What is a buy-back or close-out sale (or cancellation)?
|
involves the sale of the swap to the originial counterparty
|
|
What is a bullet swap?
|
a generic plain vanilla or interest rate swap; notional principal amount does not vary over the life of the swap
|
|
What is an amortizing swap?
|
the notional principal amount decreases in a predetermined way over the life of the swap; used to hedge loans that amortize (the outstanding principal declines)
|
|
What is an accreting swap?
|
the notional principal amount increases at a predetermined way over time
|
|
What is a roller-coaster swap?
|
the notional principal amount can rise or fall from period to period
|
|
What is a basis rate swap?
|
both parties exchange floating-rate payments based on a different money market reference rate
|
|
What are swaptions?
|
grant the option buyer the right to enter into an interest rate swap at a future date
|
|
What is a payer swaption?
|
entitles the option buyer to enter into an interest rate swao in which the buyer of the option pays a fixed rate and recieves a floating rate
|
|
What is a reciever swaption?
|
buyer of the swaption has the right to enter into an interest rate swap that requires paying a floating rate and recieving a fixed rate
|
|
What is a forward start swap?
|
swap wherein the swap does not begin until some future date that is specified in the swap agreement; beginning date some time in the future and maturity date for the swap
|
|
What are interest rate/equity swaps?
|
a swap in which one party pays a fixed or floating interest rate, while the other party pays a rate based on the return on some equity index
|
|
What is the reference rate?
|
benchmark rate used in a swap or interest rate agreement
|
|
What is an interest rate cap or ceiling?
|
when one party agrees pay the other if the reference rate exceeds a predetermined level
|
|
What is an interest rate floor?
|
when one party agrees to pay the other if the reference rate falls below a predetermined level
|
|
What is the strike rate?
|
the predetermined level of the reference interest rate
|
|
What is an interest rate collar?
|
done by buying an interest rate cap and selling an interest rate floor
|
|
What are captions?
|
options on caps
|
|
What are flotions?
|
options on floors
|
|
What are the 3 types of credit risk?
|
1. default risk
2. credit spread risk 3. downgrade risk |
|
What are the 3 types of credit derivatives?
|
1. credit options
2. credit forwards 3. credit swaps |
|
What are credit options?
|
two types:
1. credit option written on an underlying issue; no payment is default does not occur; payout if there's a default; can also be written if bond is downgraded 2. payoff is determined by the level of the credit spread over a referenced security; value of payoff is determined by a risk factor |
|
What are credit forward contracts?
|
underlying is the credit spread; payoff depends on the credit spread at the settlement date of the contract
|
|
What are credit swaps?
|
two types:
1. credit default swaps- shift credit exposure to a credit protection seller; 2. total return swaps- used by an investor to increase credit exposure; investor pays all cash flows from the referenced asset including changes in value to recieve a floating rate plus any depreciation of the referenced asset |
|
What are the two types of credit default swaps?
|
1. credit insurance- buyer pays a fee; recieves a payment every period for the life of the contract if a referenced credit defaults on a payment
2. swapping risky credit payments for certain fixed payments- investor exchanges total return on a credit risky asset for known periodic payments from the counterparty |