Interest rate swap 2 | Finance & Capital Markets | Khan Academy

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Finance and capital markets on Khan Academy: Interest is the basis of modern capital markets. Depending on whether you are lending or borrowing, it can be viewed as a return on an asset (lending) or the cost of capital (borrowing). This tutorial gives an introduction to this fundamental concept, including what it means to compound. It also gives a rule of thumb that might make it easy to do some rough interest calculations in your head.
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[@shadybaby5309]

You are way more competent than some lecturers in chartered accountancy associations. Thanks a mil for saving my time

[@theokpianocoverguy]

Just watched every finance video... I feel educated! Thanks Sal ^^

[@gerrardandeminem]

What'd you learn in specific throughout the entire course?

[@fayning]

Mortgage structures, present value of money, true meaning of buying stock and bond, put options strategy to hedge a long position of stock, interpreting companys financial statements, last but not least the 2008 crisis, among other topics, those really showed me the doors to the finance knowledge which i ve been ignorant and illiterate for many years before. I must add one more is A = L + E. It really makes me reflect, direct my life like a great corporation. I am my own shareholder, what values can i learn from a good coporation that applicable to my life, how to increase my net book value, plan my earnings, what are true assets, acquiring assets vs pure consumptions, etc...

[@aj_wuwei]

it's generally the better rated versus not so better rated companies that reach a swap agreement,hence the interest rate(coupons) disparity as clearly showin in the video by Mr.Khan. ANd we will always have a third party(SWAP maker) who will contractualize everything for the parties. the two parties may not know the other at all. Swap maker will simply make money without zero investments by the spreads that the both parties exchange(commission will always be an element)

[@sanyamsood8613]

Thanks a TON, SAL! I was totally a noob in finance when I started this 5 weeks ago and now I feel I have a lot of command on finance. You are doing great work. Keep it up! I feel educated :)

[@musak.4068]

DEC2022 For those watching, play with the numbers that A' ends up with after the IRS. If LIBOR rises, no matter what it rises to, they will still end up paying 80k/period. Fixed Rate. HOWEVER, the other benefit is if LIBOR falls significantly. Say LIBOR falls to 2%. They are paying LIBOR + 2% for a total of 40k to LENDER 1. Yet the IRS entitles them to 30k from B' (Libor + 1%) for a total payout of 10k. Company A' wins by having a fixed rate against higher LIBOR & a lower payout should LIBOR fall. Company B' is taking on the risk. So the higher LIBOR rises, the more they have to payout to company A.

[@steinistbaum2236]

Thanks for making all those 196 Videos. When I started watching a month ago, I didn't know anything about finance. 196 videos later and I have a sense of what's going on.

[@HenryLamVlog]

I spent 4 hours reading a boring text book trying to explain what u did in 8 minutes... FANTASTIC tutorial and explanation.... That probably means you could teach my 6 month module at university in probably 2 days.

[@jcguo123]

omg, that was so easy to understand after you show the calculation, thanks mate, i alwasy had trouble understanding the interest rate swap

[@piano7081]

Thank you so much ! after intensive research on interest rate swap, this is the best one explained in a layman term. Extremely grateful for this! Thanks man.

[@youracherrynut442]

This is great, thanks for explaining it so clearly. A video on this stuff (w/ diagrams) is a lot easier to absorb than a written explanation of what an IRS is. It'll be interesting to see what happens to the IRS market when LIBOR gets phased out in 2020.

[@wenjessi]

I watched most of your financial videos. You always make a complex concept easy to understand. Many thanks!

[@littleanne2431]

so far this is the best illustration ever!

[@Daniel13l]

I wish my finance professor knew how to explain did as good as this video! Thanks!

[@rashidkamara5334]

Trust me I have been struggling to understand the dynamics of interest rates swaps through reading textbooks and other lecture videos but yours is just superb. Very explicit. Thank you so much

[@andreamaldonado5723]

Thank you very much!!!! this video is excellent to further explain swaps!

[@alparslankorkmaz2964]

Nicely explained.

[@alanle18]

Paid $250 for my coaching actuaries exam manual and it nearly did not explain it as clearly and concisely as you did here. Thanks!

[@keepinmind4119]

helped me through from HS until university and college time! thanks for your knowledge. 10 years of continuous great dedication from your channel.

[@mohamedabbes6064]

Wow that's amazing to study and understand such things while having an engineering background! Thanks.

[@egesirin]

Thanks to you I won't fail my Finance exam tomorrow!! Thank you Sir Khan, THANK YOU.

[@segunhudu260]

Sir, if I say u just saved me from nights of tears😢 , sleeplessness 😅, and confusions 😢 regarding this poorly taught topic, is an understatement!!! Thank a million 😢😢

[@jonathanlau3120]

thanks mate, now I finally understand the concept!

[@coded93]

Hi, I have a Finance paper tomorrow. I have no bloody idea about Swaps. I read my textbook chapter twice, spent hours on the slides as well. I watched ur videos 2wc each and everything is so simple and falls into place. Cheers to you Thanks a lot :)

[@HP-hi7lt]

Ah this is so nice, so im definitely a visual learner

[@brianchanhere]

You are a god and a saviour. Thank you!

[@janasolnce]

thank you a lot!!! your videos are so easy to follow and understand!!! love them.

[@mirzab2848]

Brilliant, excellent explanation!

[@anirdbify]

I think B School Profs should start watching these videos to understand how to not over complicate things. Many thanks!

[@johnwoodhead5950]

Reminds me of AC and DC signals and how one can be superimposed on the other

[@klaudiao.4327]

finally I understood IRS, thanks I love to watch your video and you have a nice voice :D pozdrawiam!

[@TheMelecia]

You're awesome! saved my life literally.. if i flunk out of uni my parents will literally kill me!

[@Asifkhan-ch7mo]

Sir, a heartfelt thanks for making this video. It'll be my request to make a video on "currency swap"

[@verdaderoamor980]

Thank you so much sir for this instructive video. appreciate it ! Bravo 👏.

[@MyLegsAreKindaLong]

Thank you Sal and Khan Academy

[@16FRS]

Also just finished this ~200 video playlist lol. Thanks Sal!

[@heshanpalliyaguruge6333]

Thank you so much Mr Khan!!!!

[@justinchang9977]

Does the ir swap only happen when the lenders allow them to do so?

[@Anish-qv5kv]

Thank you. This is amazing !!!

[@mungolechishala5175]

Literally made Swaps make sense!

[@kevinrandalrulach]

Complex yet cool. Wanna try in real life

[@george-mattgrounder-bentle9019]

Qucik question: Could instead the Lender put an fixed interest rate swap on their lended out bond or asset, like in this video, to decrease their exposure to interest rate risk?

[@gauravnagarkar0]

This is excellent! Thanks a ton!

[@adityasyal2049]

Thanks Sal 😊😊

[@sudipa2010]

Thank you so much. It was a nice explanation

[@maryammurtezai631]

you are awesome!! what a clear explanation.. i really appreciate it

[@aminedjellal2111]

Thank you for your video. There is one thing I’m missing. Why would a company would accept such a deal ?

[@sunitam7505]

Simple explanation of a complex topic. Hats off @khan academy

[@jacobs9049]

Thank you for putting this up, I appreciate the explanation of credit swaps from a fellow nerd. Now we just need to figure how to get average folks to understand what's actually going on here.

[@bcnicholas123]

Last video in the Khan Academy finance playlist!

[@ambongyagloriane7152]

This was helpful, I appreciate 🙏. Okay Sir, in cases where LIBOR is not given, just the variable interest rates are given, how can one go about it?

[@vote4pedro7]

Thanks for the excellent, simple explanation. But the idea that this stuff actually happens is criminal. No wonder our system is all messed up.

[@dineshagarwal5555]

To the point and a very logical explanation.... Thanks... Keep uploading such videoes

[@ashleypoblano2100]

my question is why would company A want to swap if it was getting a better deal ? or is that because they didnt know that at time 0 ?

[@jaimeb.384]

This is pretty clear thanks! My only questions is when they talk about swap rates, what do they refer to?

[@Bakwas_bhai]

wow man, I love your videos, Keep educate us

[@syedshahzaibali4633]

Really well explained, thanks

[@tarun290886]

Thanks mate:) It was a massive help and now I think about the concept seems to be quite interesting.

[@noel2577]

Great video, i only wish you'd touch upon the actuarial side of interest rate swaps also which is very similar except we have to also deal with forward rates and spot rates when determining the swap rate.

[@monicas2539]

You forgot to say that the payments between Company A & Company B are done on a net basis. So for period 1, instead of Company A having to pay $70K & receive $60K, they just pay the net amount of $10K.

[@Mrtevybaby]

thank you! very clear and concise

[@sandeeplad616]

Nice explanation . Thank you

[@haneowz]

finally i finish this playlist thx Sal

[@HaggardFlea]

Yeee buddy! Thanks, this makes so much more sense lol if only all profs are as good as you

[@RahulSurana2k14]

you make things simpler .. Thank you 😊

[@jeremychia3048]

you're lowkey my favourite youtuber

[@jacintakerketta8641]

A very satisfying explanation.. thanks a ton 😀😀

[@ibsonng8207]

I wish our lecturer can teach the concept just as easy as this.

[@fayning]

Thanks

[@raba7878]

I dont understand how the interestes payed every period are based on the 1million borowed at the start. Shouldnt the interests change every period as we pay back some of the 1million every period?

[@francesco5669]

In fact he’s simply wrong, interest payment are calculated on the debt left to pay, so in P2 information A it would be libor 4% of 930k

[@francesco5669]

Ra Ba in P2 for A*

[@Jannygirl2000]

love how you explained it! anyway do u have vdo on 'ccs'?

[@m22m23]

Thanks.. pretty much explanatory

[@Fred-zt5ky]

Wouldn’t it be easier for A to pay 6% to B, and B to pay LIBOR to A? The result would be exactly the same. B paying LIBOR to A would cancel out the variability introduced by LIBOR to A.

[@vickysun6395]

Crystal clear!!!

[@godisgreat4430]

Awesome explanation thank you sir

[@peacelia12]

Very clear explanation! Thanks!

[@stranglesensei]

good stuff professor Sal

[@rachelyjs]

How do both companies figure out what interest rate to pay each other in the swap agreement? Thanks.

[@pathfinder6997]

Most probably both parties decide it amongst themselves

[@pratheep8240]

The video was helpful to understand the concept of interest rate Swaps... I have one query =7% notional on 1M & Libor + 1% notional on 1 million ... so this will be decided by company A&B while at the time of contract... will it be subjected to change anytime between the contract period if both company agrees?

[@suryadisamudra8097]

What's tw reason Company change Floating to fix?

[@TheSugarplum770]

Please show us credit card reconciliations in quickbooks. Any qb videos?

[@user-kc2pp9pb1q]

Who is entering the agreement as the fixed rate payer?

[@ifteqarahmed8995]

That was perfect!!! 👏👏

[@chaynikaarora1382]

But here company A is in loss... It is paying more interest now.... No any company wants to increase its cost of borrowings.. Moreover it is also mentioned in my text book that swap puts favorable impact on cost of borrowings.

[@badgoy8439]

yes but it's possible that in the upcoming periods, the LIBOR increases to 6 or 7%, and then company A will be saving money

[@youracherrynut442]

7% - 1% + 2% = 6% = new fixed interest rate for company A after the interest rate swap is executed - can you do this to determine the new fixed income rate instead of actually crunching the numbers?

[@Wooooobrucey]

I still don't get it. What is in it for company A? Both companies can never come out better off, one has to pay more than they normally would have directly on their loan in order for the other to pay less.

[@sagarbaishya8585]

sweet thanx :)

[@mihirkumar2887]

So Mr Khan all swaps are Forwards contract but not all forwards are swaps please let me know

[@ishaa31]

Thanks Sal!

[@destinynitunga1583]

Thank you

[@stikelx]

very helpful! thank you

[@nguyenhuonggiang1dba-382]

Company B is agreeing to pay Company A a variable rate? Company A already has a variable rate...I don't get it?

[@jacobhernandez4347]

seen this concept on a 10 k form they have also mentioned "floating rate ". They purchased high rated fixed taxable municipal bonds w/ interest swaps then they say convert to floating rate yields . what is floating rate yield ? and I thought municipal bonds were tax free ? they are a holding company if that is relevant

[@ishaa31]

Can you make a similar video on currency swap?

[@preetirathod8798]

Great video

[@nickcalvillo4061]

In this example what would be the incentive for A his interest rates went up and stayed up when they would have other wise been relatively low, only B came out on top with lower rates. And if borrower b and borrower a wanted the opposite of what they had, than why didn't they just take out those types of loans from the beginning? Other than that I thoroughly enjoy your videos, they're very educationally coherent, and with economics that is very rare.. Economics should be simple its common sense

[@aaronjancayanan460]

thanks man!

[@sergenikov]

thank you big times

[@FAAK27]

thank you captain !!

[@imtiyaznijhum6287]

In the first place A used to pay 60k-70k, but right after the swap it has to pay 80k fixed! Which is way more than the previous payment. Why would I enter into such contract which benifits my counterparty not me?

[@Fred-zt5ky]

There’s no variability anymore, and LIBOR might increase to 6% or more in which case A ends up winning as they only have to pay 80k whereas without the IRS they would have had to pay 90k for example if LIBOR was 7%. Basically A is betting on LIBOR increasing whereas B is betting on LIBOR staying the same or decreasing.

[@prettypinkrose4u]

Even though A pays a little more they get the stable payment they want.