Accrued Interest in Existing and Newly Executed Interest Rate Swaps

Summary

The document distinguishes valuation of an existing interest rate swap from the pricing of a newly executed swap between coupon dates. For an existing swap, its contractual cash flows are valued in full when calculating the amount for termination or buyout. Because the next payment includes the accrual period already underway, that valuation implicitly reflects accrued interest rather than counting only cash flows that begin after the valuation date.

A newly created swap entered partway through a coupon period generally uses a stub period, whose length differs from the standard coupon interval. Its rate is set to represent that shortened period. Since new swaps are rarely backdated, the trade is not treated as though it already accrued interest before execution. The answer offers a practical market convention distinction, but does not give a detailed pricing formula or address differences in documentation, settlement conventions, or quoting practices across markets. It concerns plain vanilla interest rate swaps and the meaning of value around coupon dates.

Key ideas

• An existing swap is valued using its full contractual cash flows when it is terminated or bought out.
• Valuing those cash flows includes accrual already earned within the current coupon period.
• A newly executed swap during a coupon period can use a stub period with an interpolated rate.
• New swaps typically begin without interest accrued before their execution date.

Tags

# On the buyside, when people quote a 'price' for a plain vanilla interest rate swap, does it include accrued interest?


# On the buyside, when people quote a 'price' for a plain vanilla interest rate swap, does it include accrued interest?












The valuation date falls in between coupon payment days on the swap, does the 'price' of a swap understood to include the accrued interest (interest from the previous payment date to the valuation date, as a fraction of the number of days in between) on both legs? Or is it only PV (only counting cashflows starting from the upcoming coupon payments) ?

## Answer by Attack68 (score 1)

https://quant.stackexchange.com/a/40147

If you value an existing IRS then you value its official cashflows to their full extent, i.e. implicitly including accrued interest. When an IRS is 'torn up' (or 'bought out' or 'terminated') it is natural to expect discounted value of all of its cashflows.

When a new IRS is 'created' (or 'written' or 'executed') partway through a period it will contain one (or more) 'stub-period'. These are unnatural length periods which settle to an interpolated rate representing the length of the coupon. Since new swaps are rarely created with a backwards start date this is implicitly without accrued interest.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.