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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?

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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.

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    $\begingroup$ Your second paragraph is quite an advanced case. Perhaps for introductory teaching purposes we could mention the simplest case when payment and valuation frequencies are the same and there are no special features at all: in that case the first payment (one period after inception) is indeed based on the rate at inception. $\endgroup$ – noob2 Apr 23 at 7:58
  • $\begingroup$ Hi, Thanks for replying. So in your example, based on what I have above, valuation is done on 01/01/2021 for the fixed and floating legs, the payments for this valuation are done on 1/7/2021 and 1/1/2022, since it's semi-annual the payments will be roughly 50%. Is this correct? $\endgroup$ – user1786107 Apr 23 at 12:14

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