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Understanding Interest Rate Swap Math & Pricing

&rate swap math Pricing Understanding Interest January 2007 CDIAC # 06-11 California Debt and Investment Advisory Commission &rate swap math Pricing Understanding Interest January 2007 CDIAC # 06-11 California Debt and Investment Advisory Commission 1 Introduction 1 Basic Interest Rate Swap Mechanics 3 Swap Pricing in Theory 8 Swap Pricing in Practice 12 Finding the Termination Value of a Swap 14 Swap Pricing Process 16 Conclusion 18 References p1 Introduction As California local agencies are becoming involved in the Interest rate swap market, knowledge of the basics of pric ing swaps may assist issuers to better understand initial, mark-to-market, and termination costs associated with their swap programs.

In an interest rate swap, the principal amount is not actu­ ... interest rates during the period of the swap contract. ... credit risk. A ency is assum of the U.S. Tre u bo ed ment that the yi nd issued by a g as. ury yield curve a. s the risk-free elds on bonds : its yield sho rates on U.S

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