Interest Rate Swap Glossary
- Amortizing Swap - A swap where the notional is reduced over time, generally to match the amortization of the hedged item such as a loan or mortgage.
- Basis Swap - A swap between two floating indicies, LIBOR vs EURIBOR.
- Business Day Convention - this is how a swaps payment dates and calculations will be adjusted for holidays and weekends.
- Cross-Currency Swap - a swap where the two legs are in different currencies. Can be a basis swap, fix-float or fixed-fixed.
- Fixed Rate - the fixed coupon that one entity pays the other in an interest rate swap. Expressed as an annual percentage.
- Fixed Rate Day Count Fraction - this determines how a fixed coupon is calculated. 30/360 and Actual/Actual are commonly used. See day count convention
- Floating Rate - the floating rate paid by one entity to another in a swap. The floating rate will be determined by an index such as LIBOR.
- Floating Rate Day Count Fraction - this determines how a floating coupon is calculated. Commonly ACT/360 is used. See day count convention
- Following - Business day convention when coupon dates land on a holiday or weekend, they are moved forward to the next good business day.
- LIBOR - It is an acronym for London Interbank Offered Rate average rate that surveyed banks will lend each other. As an index it is used as a basis for the floating coupons of most interest rate swaps. Another similar index is EURIBOR
- Modified Following - Business day convention, similar to following but if the next good business day is in the following month, instead the previous good business day is used.
- No Adjustment - Business day convention where coupons are not adjusted for weekends or holidays.
- Notional Amount - The amount used to calculate size of coupon payments based on the fixed or floating rate.
- Spread - the amount over or under the floating rate paid. For example LIBOR + 2% where 2% is the spread.
- Swaption - An option to buy or sell a swap at a future date.
- TARGET - This is the standard holidays used generally in Europe which includes;
- New Year's Day
- Good Friday
- Easter Monday
- 1 May (Labour Day)
- Christmas Day
- 26 December