Term
| Interest Rate Swap: Definition |
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Definition
| Agreement between 2 parties to exchange US$ interest payments for a specific maturity on an agreed notional amount. |
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Term
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Definition
| Notional Amount, Simply a reference amount used to calculate interest expense, but never repaid. |
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Term
Interest Rate Swaps, 2 Types
Coupon Swaps
Basis Swap |
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Definition
Coupon Swap: Fixed rate for floating rate
Basis Swap: floating rate for floating rate (Based on 2 different currency reference rates) |
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Term
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Definition
Example detailed in note slides:
Interest Rate Swaps
Currency Swaps
Forward Forward
FRA (Forward Rate Agreement) |
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Term
Currency Swaps:
Definition:
Purpose:
Principal |
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Definition
Definition: Two parties exchange foreign currency-denominated debt at periodic intervals
Purpose: Replace cash flows denominated in one currency with a cash flow denominated in a more desirable currency
Principal: Amounts exchanged at maturity at pre-determined exchange rate. |
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Term
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Definition
| The effective interest rate on teh money raised (discount rate that equates the PV of the future interest and principal payments to the net proceeds received.) |
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Term
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Definition
| Gives each party the right to offset any non-payment of interest or principal with a comparable non-payment |
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Term
Interest rate forwards and futures,
3 major types |
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Definition
Forward Forward
Forward rate agreements
Eurodollar Futures |
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Term
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Definition
A contract that fixes an interest rate today on a future loan or deposit.
(Lock in rate now for future loan/savings deposit based on future interest rate predictions) |
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Term
| Forward Rate Agreements (FRA's) |
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Definition
Bank preferred, Cash settled, over the counter forward contract.
Company fixes an interest rate applied to a specified future interest period on a notional amount. |
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Term
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Definition
| Cash settled futures contract for a three month, $1Million, Eurodollar deposit paying LIBOR, traded out to three years, marked to market daily. |
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Term
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Definition
| Interest Bearing securities whose interest payments are determined by reference to a formula set in advance and adjusted on specific reset dates. |
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Term
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Definition
| A floating rate instrument whose interest rate moves inversely with market interest rates. |
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