Zero-Coupon Swap: What it is, How it Works - Investopedia

A zero-coupon swap is an exchange of cash flows in which the stream of floating interest-rate payments is made periodically, as it … See more

FAQs about Zero-Coupon Swap: What it is, How it Works - Investopedia Coupon?

What is a zero coupon swap?

A zero coupon swap is similar to an interest rate swap, but offers flexibility to one of the parties. In a fixed-to-floating zero coupon swap, the fixed rate cash flows are not paid periodically, but just once at the end of the maturity of the swap contract. ...

What is a reverse zero coupon swap?

Another type is the reverse zero coupon swap, which reduces the risk for the floating interest payee since the floating interval payment schedule is maintained, but the fixed rate payment is made upfront. ...

How do interest rates affect zero coupon swap pricing?

Interest rates play a crucial role in zero coupon swap pricing. If interest rates rise, the present value of the fixed payments (discounted at the higher interest rate) will decrease, leading to a lower net payment for the fixed-rate payer. ...

What is a zero inflation coupon swap?

Zero inflation coupon swaps are a similarly-named investment agreement with a quite different method of operation, as the underlying asset is currency and the floating rate is based on inflation. Fixed and floating rate payments are both made once, at the end, based on the known inflation level. ...

How do you value a zero-coupon swap?

Valuing a zero-coupon swap involves determining the present value of the cash flows using a spot rate (or zero-coupon rate). The spot rate is an interest rate that applies to a discount bond that pays no coupon and produces just one cash flow at the maturity date. ...

How does a fixed-to-floating zero coupon swap work?

In a fixed-to-floating zero coupon swap, the fixed rate cash flows are not paid periodically, but just once at the end of the maturity of the swap contract. The other party who pays floating rate keeps making regular periodic payments following the standard swap payment schedule. ...