To calculate the zero-coupon rate for the 2-year maturity, we will strip security D into two zero-coupons: A zero coupon swap is an exchange of income streams in which the stream of floating interest-rate payments is made periodically, as it would be in a plain vanilla swap, but the stream of fixed-rate payments is made as one lump-sum payment when the swap reaches maturity instead of periodically over the life of the swap.
Hi, Thanks for your explanation. The bondholder on the end of the fixed leg of a zero coupon swap is responsible for making one payment at maturity, while the party on the end of the floating leg must make periodic payments over the contract life of the swap.
This course gives you an easy introduction to interest rates and related contracts.
Explore our Catalog Join for free and get personalized recommendations, updates and offers. The rate obtained, again by iteration, is 3. The time sensitive nature of markets also creates a pressurized environment. In this context, we will also review the arbitrage pricing theorem that provides the foundation for pricing financial derivatives.
Duration and convexity are the basic tools for managing the interest rate risk inherent in a bond portfolio.