Swaps work by having two parties trade the income generated by interest rate-bearing investments. You have a 6% fixed rate investment, but trade the cash generated by that holding for the proceeds of a 5.5% floating-rate investment. The other party gets the sure return of the fixed rate. You get to gamble a little on the floating rate, hoping it will go up.
The rate anticipation swap adds a wrinkle. The transaction involves the extra fun of guessing rate changes in the future. The details of the swap contract take into account a prediction of where interest rates will move during the period of time the swap exists.
These projections are necessarily guesses. The investors are betting that a set of circumstances will occur. The participants in the swap have a particular view of what will happen with rates and are trying to profit on that prediction.
Related or Semi-related Video
Finance: What are Bond Anticipation Note...26 Views
Finance a la shmoop what our bond anticipation notes revenue anticipation
notes and tax anticipation notes? and yeah a whole lot of anticipation going
on there all right a few things in life are certain one of them is that there [People watching movie]
will always be another James Bond movie coming out and we will all anticipate it
and um well that's kind of what anticipation notes are all about, minus the
massive explosions ticking bombs and cars that squirt oil out of the tailpipe
when a municipality or company wants to fund a project but
just can't wait to issue a larger number of bonds or more money or fatter dough [Stack of cash appears]
to get going with the union construction workers building parking lots and
whatever else it is they want then they can issue bond anticipation notes... these
are short-term smaller bonds issued before a larger funding project like
anticipating the large bonds that they just know are coming in but can't wait to get
started so let's go raise the money today right when the company or
municipality makes a larger bond issue later while they can use the money from [Money transfers to company]
that issue to pay for the bond anticipation notes, like borrowing
from Peter to pay Paul sorta so that's a bond anticipation note and the same
applies to revenue anticipation notes like let's say you're guaranteed a
million dollars from the NFL for the purchase of your super duper lemonade to [Check for super duper lemon appears]
be paid on the day after the Super Bowl well the NFL's credit is good they pay
their bills odds are really good you'll deliver what you promised to the NFL to
slake the thirst of the thirsty and yelling in theory you could issue a note
ahead of that blessed event go Packers! and collect the million bucks
ahead of when NFL pays you paying whatever risk premium to your investors [Money transfers to investors]
ie they might pay you nine hundred fifty grand today for a million bucks a week
or two or three from now when the Super Bowl is over while in real life these
kinds of "revenues" are really more like fundings and
they apply to very short-term muni bonds usually which are trying to bridge cash [Pile of money falls]
needs from today until they can actually raise the dough from John Q local Public
Citizen well tax anticipation notes are yet another flavor of the same drink tax [Person opens can of cola]
anticipation notes rely on the fact that the city will collect X dollars in taxes
so many months from now they issue bonds today using that expected tax money that
they just know is coming in as collateral so that they can you know pay
for stuff today so yeah those are bond anticipation notes, revenue
anticipation notes and tax anticipation notes be sure to watch our equally
thrilling video invest another day.. spoiler alert Q invents an auto [Q and Pierce Brosnan with a robot]
investing bought for 007 you'll be on the edge of your seat...
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