How FRA Settlement Differs from a Zero-Coupon Swap

Summary

The document compares a forward rate agreement (FRA) with a zero-coupon swap, focusing on payment timing and the number of accrual periods. An FRA exchanges fixed and floating interest over a single period, with settlement at the beginning of that period. A zero-coupon swap can cover multiple periods and settles the accumulated fixed-versus-floating amount at the end of the final period.

The distinction in timing is partly economic: an FRA’s early settlement is discounted to reflect the value of a payment made at the end of the reference period, while the swap pays at that later date without that same settlement discount. The explanation gives no pricing formulas or numerical example, and it does not fully analyze when a forward-starting single-period zero-coupon swap might be replicated by an FRA. Its useful takeaway is that payment convention and period count matter when comparing the contracts.

Key ideas

• An FRA exchanges fixed and floating rates over one reference period.
• An FRA settles at the start of the period, with the amount discounted to reflect early payment.
• A zero-coupon swap may aggregate multiple periods and pays at the end of the final period.
• Contract equivalence depends on settlement timing as well as the number of periods.

Tags

# Difference between FRA and a zero coupon swap


# Difference between FRA and a zero coupon swap












Wanted to know the difference between an FRA and zero coupon swap with both legs having payment at maturity. If the zero coupon swap is forward starting, will it be equivalent to an FRA?

## Answer by Chris Taylor (score 5)

https://quant.stackexchange.com/a/47385

A forward rate agreement is an agreement to exchange a fixed for a floating rate over one period, with the payment being made at the start of the period.

A zero coupon swap (with both legs paid at maturity) is an agreement to exchange a fixed for floating rate over one or more periods, with the payments being made at the end of the final period.

So the two main differences are (a) a zero coupon swap can contain multiple payment periods, a FRA only has one (b) the FRA payment happens at the start of the reference period (but is discounted so that it is equivalent to a payment at the end) and the ZCS payment happens at the end of the reference period (undiscounted).

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.