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?


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).

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  • $\begingroup$ Agree, but doesnt zero coupon swap mean that there is only one payment? $\endgroup$ – Rejath Johny Aug 29 '19 at 12:47
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    $\begingroup$ It means there is only one payment, but the payment could be calculated over multiple reference periods. For example, a 1Y zero coupon swap on a 3M rate would have four reference periods where a payment is calculated, even though all of the payments are made at the maturity of the swap. $\endgroup$ – Chris Taylor Aug 29 '19 at 13:51
  • $\begingroup$ Ohh yes! I had missed that. Thanks $\endgroup$ – Rejath Johny Aug 29 '19 at 13:54

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