Identifier: C3T7L3 · Revision: 2026-10-26 · Classification: restricted

Decision and objectives

Calculate fixed and floating single-currency swap legs. The decision record must connect the exposure, cash dates and implementable contract, rather than stop at a favorable price forecast.

By the end, you can calculate fixed and floating single-currency swap legs; reconcile a floating loan plus pay-fixed swap; identify benchmark and spread mismatches.

Prerequisite: C3T7L2; completed Classes 1 and 2 and the Stock Market School foundation or Forex School foundation. All cases below are hypothetical; their prices, costs, rates, dates, contractual assumptions and collateral amounts are teaching inputs, not current offers.

Mechanics

A plain single-currency interest rate swap exchanges fixed and floating interest amounts on a reference notional, generally without exchanging that notional. A borrower with floating debt can pay fixed and receive the matching floating benchmark, leaving the debt spread and contractual differences. The swap provider is a counterparty on the derivative; the original lender remains creditor on the loan.

Price and return drivers

Fixed leg = notional × fixed rate × year fraction. Floating leg uses the contract reset and accrual method. In this simple supplied example the floating rate is known for the whole coupon period. Net paid by pay-fixed party = fixed leg − received floating leg, assuming same currency/date and agreed payment netting. Pre-maturity value depends on all remaining coupons and discounting, not just the current net payment.

Worked case

Hypothetical TRY 1,000,000 notional; pay fixed 30%, receive floating 34%; one 90/360 quarter. Fixed payment TRY 75,000, floating receipt TRY 85,000, net receipt TRY 10,000. Debt costs floating 34% plus 3% spread: TRY 92,500. Net debt-plus-swap coupon is 92,500 − 10,000 = TRY 82,500, equivalent to 33% annual for this quarter. Supplied quarterly allocation of setup/credit cost TRY 1,000 and collateral funding TRY 500 makes TRY 84,000 total before tax; these expenses do not change the contractual coupon rate.

Adverse case

At floating 20%, 30% and 40%, net swap payments by the fixed payer are TRY 25,000, zero and −TRY 25,000. These coupon outcomes are not whole-swap closeout values. With matching debt benchmark and unchanged 3% spread, combined coupon remains TRY 82,500 in each state. If the debt spread rises to 6%, combined becomes TRY 90,000. Different reset dates or benchmark definitions add another residual, even when notionals match.

Practical use

Verify provider access, notional schedule, fixed/floating conventions, payment netting, reset dates, collateral and termination terms. A swap does not refinance principal or remove a lender covenant. Include debt spread, credit-line and setup fees, collateral financing, unwind spread and tax. An apparently zero-cost swap may still have unfavorable terms embedded in the fixed rate.

Reconcile the confirmation, position register and cash statement separately. Costs include the quoted bid/ask spread, brokerage and clearing charges, collateral or principal financing, currency conversion, custody where relevant, and exit or termination charges. A mark is not a fill. Any amount explicitly excluded below remains outside the reported result. Tax is excluded from these teaching cases: an actual comparison requires income year, investor residence and individual/corporate status, contract and acquisition dates, settlement form and effective law. The GIB guide, checked 2026-10-26, covers 2025 individual investment income, so its publication date alone does not settle a 2026 derivative liability.

Decision boundaries

Use pay-fixed/receive-floating for a matching floating liability when fixed budget certainty is worth the cost and collateral risk. A floating-rate fall produces swap payments even while the debt becomes cheaper; do not evaluate one leg alone. Defer if benchmark mismatch or termination cost cannot be explained.

Practice and references

Exercise: hypothetical TRY 2,000,000 notional, pay fixed 28%, receive floating 32%, half-year simple accrual. Calculate both swap legs and the combined cost with a matching loan at floating plus 2%. Solution: fixed = 2,000,000 × 0.28 × 0.5 = TRY 280,000; floating TRY 320,000; net receipt TRY 40,000. A matching loan at floating plus 2% costs TRY 340,000, leaving TRY 300,000 combined before fees, the stated 30% annual fixed-plus-spread equivalent.

Takeaway: Identify benchmark and spread mismatches using the actual cash schedule, with every excluded cost and remaining exposure stated.

Reference card: interest-rate-swap. Formula: Pay-fixed interest swap net coupon. Glossary: Interest rate swap, Reset date. Next lesson: C3T7L4. Topic test.

Sources and verification date (2026-10-26):

Shared reference guide