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.Related or Semi-related Video
Finance: What is Bond Amortization?7 Views
Finance a la shmoop what is bond amortization? okay fancy term easy
concept the basic idea is that you have to "revalue" what a bond is
actually worth each period which usually means twice a year because bonds pay [Monthly calendar appears]
interest on the you know semester system yeah twice a year so let's say you've
paid seven hundred bucks for a bond with a 5% coupon which comes due for a
thousand bucks in ten years over that time you'll have received two things the
5% per year interest from the bond in cash paid along the way and the [5% interest per year appears]
appreciation of the 700 bucks to become the thousand dollar par value at which
point it will eventually pay back its principal so to amortize the $300 of
appreciation of that bond over ten years while you could attribute 30 bucks a
year in appreciation each year such that after we'll say three and a half years
you'd hold the bond as having appreciated 3.5 times 30 bucks or $105 [Straight line appreciation formula appears]
in appreciation making the bond worth at that point in time eight hundred five
dollars oh yeah fancy but also pretty easy
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