Interest Rate Swaps Explained | Example Calculation

[@RyanOConnellCFA]

🔑 Join this channel to get access to perks & support my work: kzbin.info/door/Akyj2N9kd0HtKhCrejsYWQjoin 💾 Download Free Excel File: ► Grab the file from this video here: ryanoconnellfinance.com/product/interest-rate-swaps-excel-model/

[@b-reel]

I can't believe there is just 4.3K subscribers... this channel will grow! Excellent content!

[@RyanOConnellCFA]

Thank you Bryan, I really appreciate it!

[@mradjamesable]

Great Video Ryan - as they say if you can't explain a complex topic simply, you don't understand it. Thanks for making the easy for the layman to understand (layman = me)

[@RyanOConnellCFA]

Thank you Adrian, I really appreciate that! You may be less of a layman than you think if this video was easy to understand 💪

[@gregsLyrics]

Wow! Eyeopening. I constantly hear about swap rates and how the economy is in a melt down. Appreciate the hard work you put into making great content.

[@ganeshmalpani6839]

Found your channel through reddit's CFA page, love all your content. Short and to the point.

[@RyanOConnellCFA]

Thank you Ganesh! Has someone shared a video of mine over on that page recently?

[@ganeshmalpani6839]

@@RyanOConnellCFA not recently, it was a while ago. Got the time to check your videos now.

[@RyanOConnellCFA]

@@ganeshmalpani6839 Awesome, I appreciate you checking them out now

[@ashwinjanyani]

This is excellent! thanks for sharing the file as well. Really appreciate your efforts.

[@RyanOConnellCFA]

Glad it was helpful Ashwin!

[@bluecry2000]

Ryan great explaination. I wonder when we use continuously compounding whne calculating SWAPs. Also how would it change in that case? If it has a short explaination, it would be great to hear from you. All the best.

[@nerazzurro1234]

OMG that was so clear!!!

[@mphys5370]

Great video Ryan! Can do a real worl example using SOFR please?

[@RyanOConnellCFA]

This is a good idea for a future video! I can look into it, I'll warn you that I have a pretty large backlog right now so it won't be for a while

[@wajihchtiba34]

I love the content !! just one remark in 5:45 you said " we djust the floating rate" instead of the fixed rate (you mentioned the cell name correctly)

[@RyanOConnellCFA]

Thank you for the heads up Wajih!

[@souravganguly6569]

Good

[@ashwiiniinandesshwar3062]

I have a question on the floating side. You just took one floating rate for 0.5 years. What about other rates?

[@nickpapasavvas8133]

Thanks a lot for the video. With what tools can such an interest rate swap for the euro be set up?

[@RyanOConnellCFA]

Hi @nickpapasavvas8133, I'm glad you found the video helpful! Setting up an interest rate swap for the euro typically involves a few key tools: you'll need access to financial derivatives platforms like Bloomberg or Reuters to analyze rates and terms

[@yulixin8016]

Hi Isn't 2 years-fixed rate bond- cash flow be 175,000 as well? I'm just wondering if this leads to a over calculation on the final value.

[@kavitabatra4537]

Informative video like always. Want to understand more about currency and equity swap via numerical examples.

[@RyanOConnellCFA]

Glad you enjoyed it Kavita! I may make videos on those topics in the future

[@vivekraunak]

Thanks @ryan for the explanation. Could you please help me understand why in floating rate bond notional principle got added in 1st cashflow? In my understanding, Principle is paid to the bondholder at the end. Also, why is the remaining cashflow 0?

[@Sisyphus2310]

Great content, Ryan! And thanks for sharing the excel file. :-)

[@RyanOConnellCFA]

My pleasure Mohan!

[@shrayanduari9119]

Excellent explanation

[@RyanOConnellCFA]

Glad it was helpful!

[@elyahonarchian]

I got counter offer it says "strike from contract loan interest rate not to exceed 7%" What does it means?

[@RyanOConnellCFA]

Could you explain what you mean by "counter offer"?

[@YenNguyen-he4nt]

how about valuing the remaining floating cashflow, can we use the boostraping for pricing them?

[@RyanOConnellCFA]

The beauty is that you do not need to value the remaining floating cashflow!

[@devinaarastogi2420]

hi Ryan, can you please make a video on how to calculate VAR for IRS and CDS.

[@RyanOConnellCFA]

Hello Devina, I can look into this topic in the future

[@SalK-3S3K]

1-is it appropriate to use risk free rates (treasuries in this example) to value swaps? 2-@5:06, why the rate change to 4.5%, changes value of fixed swap bond, as fixed swap bond has rate fixed at 3.5%?

[@RyanOConnellCFA]

1. You can use the treasury curve to value swaps but I believe, in practice, the LIBOR curve is used more frequently. 2. You can see @2:25 when we determine the value of each side of the swap, the pay fixed side is price sensitive to changes in all rates because the present value of each payment is determined by the market rates.

[@SalK-3S3K]

@@RyanOConnellCFA thank you!

[@RyanOConnellCFA]

@@SalK-3S3K My pleasure!

[@MrAyushguptaful]

I have a doubt. In floating rate calculation, we are taking only 3% rate. But what about other rates for 1 year, 1.5 years and 2 years. Should we not adjust swap for every term(floating rate bond side). If not What's the logic

[@Harry-tc3sn]

In solver you have used fixed rate despite saying floating rate. What is the correct way?

[@RyanOConnellCFA]

Sorry about that, I said it backwards! I should have said that we were solving for the fixed rate, not the floating rate

[@DawudJoadat]

thank you so much! you are great!!!

[@RyanOConnellCFA]

I appreciate it, and thank you!

[@jinjin2061]

Hey Ryan, don't really understand why is there only 1 cashflow for Floating rate bond? How does the floating rate bond resets at par every coupon date relate to the cashflow stream?

[@RyanOConnellCFA]

This is because at that point, the bond would reprice to par essentially as the floating rate updates to the market rate. I know it is quite confusing but just know that this method provides you with the correct answer

[@stevenintexas6947]

@@RyanOConnellCFA Hey Ryan, excellent video. I'd like to see an example where the floating rate bond has a Cap. Bonds with Caps will not reprice to par as they get close to their coupon or interest rate Cap.

[@RyanOConnellCFA]

I can definitely look into working on an example like this in the future!

[@mahmoudkadrynafei]

Please can you clarify can we value the floating part based on the tbill yield curve for each period (6 month fixed) thus we bring the pv and summed like fixed rate. Thanks a lot

[@RyanOConnellCFA]

Hi there! Absolutely, you can value the floating part of an interest rate swap by using the T-bill yield curve for each period (e.g., 6 months). To do this, you would calculate the present value (PV) of each expected floating payment, using the corresponding T-bill yield as the discount rate. Then, you would sum up the present values of all the floating payments to obtain the total present value of the floating leg. This approach essentially treats each floating payment as if it were fixed at the current yield curve, allowing you to compare and value both legs of the swap. I hope this helps! Let me know if you have any more questions.

[@alessandrodoimo8146]

Hi Ryan, were the covariance right? The diagonal of the covariance, not close to zero Many thanks for the video

[@RyanOConnellCFA]

Hello, did you mean to comment this on a different video? I did not create a covariance matrix in this swap video

[@user-wr4yl7tx3w]

Can you elaborate on your point about the float side? Why only a single cash flow?

[@RyanOConnellCFA]

Hello, this is because the floating rate side of the swap reprices to par after the next cash flow, so we really only need to value you the next cash flow as all future cashflows beyond that would assumed to be equal to par. Does that make sense?

[@user-wr4yl7tx3w]

Sorry not quite. Not sure why that helps. May be it might take a video to explain why the math works.

[@mphys5370]

I didn't understand either

[@souravganguly6569]

Good

[@philliphochman1654]

"Received whole cash flow .5 years in the future. No cash flows beyond that bc it's a floating rate bond that reprices itself itself back to par at every coupon date." Sorry, I'm not clear on this, if it's semiannual payments and it's a 2 year instrument, why aren't there more payments?

[@RyanOConnellCFA]

The interest payments on floating rate bonds adjust periodically to match prevailing market rates. Since these adjustments ensure that the bond's yield remains in line with market rates, the bond's price does not deviate significantly from its face value. As a result, one needs only to consider the first cash flow, which includes the initial payment and the principal repayment at the end, to calculate the bond's present value. Other future cash flows are automatically adjusted for, thereby eliminating the need to individually discount them.

[@little.rascal.]

Hi Ryan, I am confused about the float side only having 1 cash flow. Would you be able to provide a clarification? Thanks Ryan.

[@RyanOConnellCFA]

Hello. The floating side has only 1 cash flow because at that point, the bond would reprice to par essentially as the floating rate updates to the market rate and we thus have no need to price in any future cash flows

[@oliviaboija7259]

Should the price difference be zero?

[@RyanOConnellCFA]

At day 1 it should be because value on both sides of the swap is 0 upon initiation. This satisfies the arbitrage free condition. However, overtime as market interest rates change, one side wins by the same amount that the other side losses. It is a zero sum game

[@asvlogs2288]

Amazing

[@lzra8111]

Hi Ryan, great stuff thank you very much. One thing i always wondered how it worked in practice as opposed to in theory is the yield curve and interest rates to use. How a swap works in theory is completely clear to me (i got my CFA charter in February so that helps haha). I work in real estate and i was given the task to value a swap that is hedging a variable rate loan on a property. the floating payer pays 3M EURIBOR, while the fixed payer pays 0,208% with a maturity to 30th Sept 2024. And that is where it gets unclear to me. EURIBOR curve does not extend until that maturity, since max maturity is 12M. so i got 1M, 3M, 6M and 12M EURIBOR. So the EURIBOR forward curve determines the future floating payments, so far so good. but what rate do i use to discount those future payments? i cant use forward rates to discount and i have no spot rates above 12M. pls help and sorry for the long message! cheers all the best L.

[@RyanOConnellCFA]

This is a really interesting problem. I'm sorry to say that I don't know how you would discount it without having any spot rates or forward rates that go beyond 12 months. Is there another curve you could possibly use? You could try to find a similar curve as the EURIBOR curve to use but it is a weird situation to be sure

[@vergil62]

The Euribor futures curve on Eurex goes out to 5 years, providing a forward curve.

[@swapskillsacademy575]

@@vergil62 To be precise we use the forward Euribor curve to generate zero coupon discount factors for each maturity. This is a more accurate discounting rate. MMake sure to note the day count and frequency of the fixed rate,