In an interest rate swap, is the first payment based on the floating and fixed values set at inception?

Question

Let assume 2 parties agree a plain vanilla swap with the following terms:

• Notional: $100,000
• Length/Tenor: 3 year
• Payment/Settlement Periods:
• Annual Start Date: 01/01/2021
• Floating Rate on Start Date: 4% Fixed
• Rate on Start Date: 5%
• Payment Terms: 10 days in arrears

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 1

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.