CMA Final · Strategic Financial Management · Swaps
In a plain vanilla interest rate swap, the notional principal is Rs 25 crore. Which statement about the notional principal is correct?
The notional principal is used only to compute the interest payments and is not exchanged between the parties. Only the net interest difference is settled; exchange of principal at start and end is characteristic of currency swaps, not plain interest rate swaps.
- AIt is exchanged in full at the start and end of the swap
- BIt is used only to compute interest payments and is not exchangedCorrect
- CIt is exchanged only at maturity
- DIt is paid by the fixed-rate payer to the floating-rate payer
Explanation
In an interest rate swap the notional is a reference amount used to calculate the fixed and floating payments. It is never exchanged, and only net interest differences are settled. Exchange of principal is a feature of currency swaps.
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