Amortizing Swap

  

An amortizing swap involves two parties making a deal where one pays a fixed rate of interest and the other pays a floating rate of interest (another way to say it is a variable interest rate). Both payments are based on a set principal amount that decreases over time, such as a mortgage.

Let’s say Joe Investor buys a property with a variable interest rate tied to the short-term Treasury rate. Perhaps he could only qualify for this variable rate. He rents out the property for a fixed monthly payment. To protect himself from rising interest rates that would cause his mortgage payments to exceed his rent revenue, Joe makes a swap agreement with Alice Investor where he will exchange his variable rate for a fixed rate, avoiding most of the risk.

One thing to note: Joe and Jill don't trade assets. They just trade the interest payments for their assets. So a salary swap might involve you switching salaries with someone, while you both continue to perform the same jobs as before. Jobs don't change, just salaries. That's a swap.

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Finance: What is a swap, and what is a s...49 Views

00:00

Finance allah shmoop what is a swap And what is

00:05

a swap Shin Um can we just say it's an

00:09

option to swap You know like microsoft is a micro

00:13

computer software thing or like the electrocution is electricity and

00:17

execution or the bromance is you know brother and romance

00:22

which is something totally different when dealing with gerbils Anyway

00:25

one day a guy was holding a swap turned a

00:27

corner wasn't looking where he was going then glam o

00:30

he ran into an option What came of it was

00:32

a super hybrid type of security were in a slop

00:36

like i swap you so many dollars for so many

00:38

euros is tacked onto an option You want the ability

00:43

to pay off your loan either in us dollars or

00:46

in euros assuming they still exist when your loan comes

00:49

due That whole brexit thing that issue have the option

00:53

to swap the flavor of payments you're making for the

00:57

hundred grand You borrowed no it's houses play out well

01:01

When the bond was issued one dollar bought you one

01:03

euro and the interest rate was eight percent So you

01:06

paid eight grand a year to rent that hundred for

01:08

ten years at which point you're going to pay it

01:11

all off simple but after five years the exchange rates

01:14

have drifted massively Magic fairy dust was sprinkled by wizards

01:18

all over europe They beat back the thirty two hour

01:21

work week Corruption unions and economic misery wrought by not

01:25

being able to compete with china russia in africa and

01:28

now amazingly the euro is a much stronger currency than

01:32

the u s dollar that's kind of a fictional story

01:34

here that we'll make enough In fact one euro buys

01:37

you two u s dollars like it when the euro

01:39

was first put out there So if you holding the

01:42

swap shin on the interest payment flavor of the hundred

01:46

grand you borrowed if you so choose you can pay

01:50

that eight grand in euros that is instead of the

01:53

eight thousand dollars a year in interest you can pay

01:56

for thousand euros It's almost a ziff your interest rate

02:00

was cut in half That's not really it's a value

02:03

is the same it's just the number of units were

02:05

cut have theirs You know that works And if you

02:07

live in europe and work in europe and we're paid

02:09

in euros Well it really is like a roman holiday

02:11

of interest rates of just want to focus on the

02:13

numbers But the values of the same there's No free 00:02:15.938 --> [endTime] lunch here even in swap shen lang

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