FRM Part I · FRM Exam Part I · Swaps
Which of the following best describes an amortizing swap and a related variant, the step-up swap?
In an amortizing swap the notional principal falls over time on a set schedule, matching a repaying loan, while in a step-up swap the notional rises on a schedule, matching a loan that is drawn down progressively. Both still exchange fixed and floating payments.
- AIn an amortizing swap the notional declines over time according to a schedule; in a step-up swap it increases over timeCorrect
- BIn an amortizing swap the notional increases over time; in a step-up swap it declines
- CBoth have constant notional but different fixed rates
- DAn amortizing swap has no floating leg; a step-up swap has no fixed leg
Explanation
Amortizing swaps have a notional that reduces on a predetermined schedule, suiting a loan being repaid, while step-up swaps have a notional that rises over time, suiting drawdown borrowing.
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