Stub Floating Payments in Broken-Date Vanilla Swaps

Summary

The document asks how standard conventions determine the initial stub cash flows in a vanilla interest rate swap with annual fixed payments and semiannual floating payments. Its example starts between regular payment dates and ends on a later date, so the first fixed and floating accrual periods have different lengths from the standard schedule.

It raises whether the first fixed payment uses the quoted annual rate times the actual stub year fraction, and whether the first floating payment uses a current interpolated fixing or a prior fixing, with accrual adjusted for the stub period. The text provides no answer, evidence, or convention details; it is a question rather than an explanation. The appropriate treatment can depend on the swap’s market, schedule, day-count, and fixing conventions, none of which are resolved here.

Key ideas

• Broken-date swaps can begin with irregular accrual periods.
• The question distinguishes the fixed stub amount from the annual fixed coupon rate.
• It asks how the initial floating stub rate is determined and accrued.
• The document does not provide a convention or answer.

Tags

# What is the market convention for the stub floating payment on a vanilla swap?


# What is the market convention for the stub floating payment on a vanilla swap?












Let's say I have a plain vanilla "broken date" swap (Annual fixed, 6m float) that I enter into today (10th Nov 20 for settle T+2, 12th Nov 20) and which ends on 16th August 2023. The swap is priced for zero PV. Let's say the fixed rate comes out at 1%.

The first fixed payment will be on 16th August 2021, and the first floating payment on 16th Feb 2021 (forgetting about good/bad days). Two rather basic questions:

- What is the fixed cashflow on 16th August 21? Is it 1% or 1% * fraction of year(12th Nov 20 -> 16th Aug 21)?

- What fix is used for the floating rate (an interpolated rate off today's fix(es), or a historical fix from 16-Aug-20), and again is it pro-rated by period fraction?

I should probably know the answer, and clearly there is a convention, as when trading broken-dates swaps there is never a discussion about what float rate to use (and dealers will all give very similar quotes for the fixed), but I'd be grateful to know what the convention is!

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