Floating-Rate Swap Payments and Inception Rates
Summary
The document clarifies timing and rate setting in a plain-vanilla interest rate swap. Payments are not typically exchanged immediately when the swap begins, and payment dates do not have to coincide with valuation dates. The fixed and floating legs may also use different payment frequencies and distinct conventions, as illustrated by an example with a fixed annual rate and a floating money-market reference plus a spread.
The first payment is not necessarily calculated using the floating rate observed at inception. The floating leg references a rate that changes over time, so the applicable rate depends on the terms and reset dates of the swap. The response is brief and gives no full payment schedule or detailed accrual example. Actual timing and cash flows therefore depend on the contract’s reset, accrual, settlement, and payment conventions.
Key ideas
- Swap payments generally begin after inception rather than being exchanged immediately.
- Valuation frequency and payment frequency can differ.
- Fixed and floating legs may have different payment schedules and rate conventions.
- The floating payment depends on the reference rate applicable under the swap’s reset terms, not necessarily the inception rate.
Tags
Full text
# In an interest rate swap, is the first payment based on the floating and fixed values set at inception? # In an interest rate swap, is the first payment based on the floating and fixed values set at inception? Let assume 2 parties agree a plain vanilla swap with the following terms: - Length/Tenor: 3 year - Payment/Settlement Periods: - Floating Rate on Start Date: 4% Fixed Would the valuation and payment schedule look like this: - Valuation Point 1 - 01/01/2021 (payments completed by 10/01/2021) - Valuation Point 2 - 01/01/2022 (payments completed by 10/01/2022) - Valuation Point 3 - 01/01/2023 (payments completed by 10/01/2023) Or - Valuation Point 1 - 01/01/2022 (payments completed by 10/01/2022) - Valuation Point 2 - 01/01/2023 (payments completed by 10/01/2023) - Valuation Point 3 - 01/01/2024 (payments completed by 10/01/2024) Basically is the first payment always based on the swap rate and floating rate that you get at inception? ## Answer by Andreas (score 1) https://quant.stackexchange.com/a/53546 You would typically not exchange payments immediately at the start. Also, payment and valuation frequencies do not need to match. You could have a fixed leg at 5% p.a. and a variable leg at 3-month money market + 50bps with semi annual payment of the net amount outstanding. And to answer your question: The first payment does not always depend on the rate you get at inception, since the reference rate for the variable leg changes over time.
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