Question #1463

Which of the following statements about interest rate swaps is FALSE?
A) A plain vanilla interest rate swap is a fixed rate for a variable rate swap
B) The parties agreeing to a swap typically make no margin deposit
C) The notional principal amount is used to determine the amount of the interest payments
D) The counterparties exchange the notional principal at initiation and termination while only net
interest rate payments are exchanged on the settlement dates

Expert's answer

Tha Statement D is FALSE. In a plain vanilla interest rate swap, one

counterparty agrees to pay a sequence of fixed-rate interest payments and to

receive a sequence of floating-rate interest payments. Notional Principal Amount

is the predetermined dollar amount on which the exchanged interest payments are

based. In an interest rate swap, the principal amount is not actually exchanged

between the counterparties, rather, interest payments are exchanged based on a

"notional amount” or “notional

principal.”

counterparty agrees to pay a sequence of fixed-rate interest payments and to

receive a sequence of floating-rate interest payments. Notional Principal Amount

is the predetermined dollar amount on which the exchanged interest payments are

based. In an interest rate swap, the principal amount is not actually exchanged

between the counterparties, rather, interest payments are exchanged based on a

"notional amount” or “notional

principal.”

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