Zero Coupon Inflation Swap

DEFINITION of 'Zero Coupon Inflation Swap'

An exchange of cash flows that allows investors to reduce or increase their exposure to the risk of a decline in the purchasing power of money. In a zero coupon inflation swap, which is a basic type of inflation derivative, an income stream that is tied to the rate of inflation is exchanged for an income stream with a fixed interest rate. However, instead of actually exchanging payments periodically, both income streams are paid as one lump-sum payment when the swap reaches maturity and the inflation level is known.

BREAKING DOWN 'Zero Coupon Inflation Swap'

The currency of the swap determines the price index that is used to calculate the rate of inflation. For example, a swap denominated in U.S. dollars would be based on the Consumer Price Index of the United States, while a swap denominated in British pounds would typically be based on Great Britain's Retail Price Index. Other financial instruments that can be used to hedge against inflation risk are real yield inflation swaps, price index inflation swaps, Treasury Inflation Protected Securities (TIPS), municipal and corporate inflation-linked securities, inflation-linked certificates of deposit and inflation-linked savings bonds.

RELATED TERMS
  1. Zero Coupon Swap

    An exchange of income streams in which the stream of floating ...
  2. Inflation Swap

    A derivative used to transfer inflation risk from one party to ...
  3. Reverse Swap

    An exchange of cash flow streams that undoes the effects of an ...
  4. Swap Rate

    The rate of the fixed portion of a swap as determined by its ...
  5. Swap

    A derivative contract through which two parties exchange financial ...
  6. Macroeconomic Swap

    A type of derivative designed to help companies whose revenues ...
Related Articles
  1. Investing

    What Warren Buffet Calls "Weapons of Mass Destruction": Understanding the Swap Industry

    A full analysis of how the swap industry works.
  2. Investing

    What's an Interest Rate Swap?

    An interest rate swap is an exchange of future interest receipts. Essentially, one stream of future interest payments is exchanged for another, based on a specified principal amount.
  3. Forex Education

    Currency Swap Basics

    Find out what makes currency swaps unique and slightly more complicated than other types of swaps.
  4. Investing Basics

    Different Types of Swaps

    Investopedia explores the most common types of swap contracts.
  5. Trading Strategies

    Interest Rate Swaps Explained

    Plain interest rate swaps that enable the parties involved to exchange fixed and floating cash flows.
  6. Investing

    How To Read Interest Rate Swap Quotes

    Puzzled by interest rate swap quotes terminology? Investopedia explains how to read the interest rate swap quotes
  7. Bonds & Fixed Income

    The Advantages Of Bond Swapping

    This technique can add diversity to your portfolio and lower your taxes. Find out how.
  8. Forex Education

    Hedging With Currency Swaps

    The wrong currency movement can crush positive portfolio returns. Find out how to hedge against it.
  9. Mutual Funds & ETFs

    PTTRX: PIMCO Total Return Fund Top 5 Holdings Analysis

    Explore the complicated and often arcane makeup of the PIMCO Total Return Fund, and identify the fund's management style and top five holdings.
  10. Investing Basics

    Inflation's Impact On Stock Returns

    When stocks are divided into growth and value categories, the evidence is clear that value stocks perform better in periods of high inflation, and growth stocks perform better during periods ...
RELATED FAQS
  1. Can bond traders trade on interest rate swaps?

    Read about interest rate swaps and why these transactions are performed by institutional actors in the bond market, not individual ... Read Answer >>
  2. What would motivate an entity to enter into a swap agreement?

    Learn why parties enter into swap agreements to hedge their risks, and understand how the different legs of a swap agreement ... Read Answer >>
  3. How do companies benefit from interest rate and currency swaps?

    An interest rate swap involves the exchange of cash flows between two parties based on interest payments for a particular ... Read Answer >>
  4. What are some risks a company takes when entering a currency swap?

    Read about the risks associated with performing a currency swap, including counterparty credit risk in the event that one ... Read Answer >>
  5. What is an absolute rate?

    An absolute rate is easy to understand once you know the basics of an interest rate swap. An absolute rate is the fixed rate ... Read Answer >>
  6. When was the first swap agreement and why were swaps created?

    Learn about the history of swap agreements, the first swap agreement between IBM and the World Bank, and how swaps have evolved ... Read Answer >>
Hot Definitions
  1. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage ...
  2. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  3. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  4. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  5. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  6. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
Trading Center