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CFA Level I · CFA Level I Exam · Forward Commitment and Contingent Claim Features and Instruments

In a plain vanilla interest rate swap, the two counterparties most likely exchange:

The counterparties exchange net interest payments calculated on a notional principal. The notional is only a reference amount for computing interest and is not exchanged. On each settlement date the fixed and floating amounts are netted, so only the difference changes hands.

  1. Aonly the notional principal at initiation and maturity
  2. Bnet interest payments calculated on a notional principalCorrect
  3. Cthe full fixed and floating payments, with the principal netted out at maturity

Explanation

In a plain vanilla swap the notional principal is never exchanged. Only the interest payments, fixed against floating on the same notional, are swapped, and usually only the net difference is paid on each settlement date. The other options wrongly describe exchange of principal or of gross payments.

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