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 a la shmoop what is bond amortization? okay fancy term easy

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concept the basic idea is that you have to "revalue" what a bond is

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actually worth each period which usually means twice a year because bonds pay [Monthly calendar appears]

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interest on the you know semester system yeah twice a year so let's say you've

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paid seven hundred bucks for a bond with a 5% coupon which comes due for a

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thousand bucks in ten years over that time you'll have received two things the

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5% per year interest from the bond in cash paid along the way and the [5% interest per year appears]

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appreciation of the 700 bucks to become the thousand dollar par value at which

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point it will eventually pay back its principal so to amortize the $300 of

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appreciation of that bond over ten years while you could attribute 30 bucks a

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year in appreciation each year such that after we'll say three and a half years

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in appreciation making the bond worth at that point in time eight hundred five

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dollars oh yeah fancy but also pretty easy

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