Zero Coupon Swap

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DEFINITION of 'Zero Coupon Swap'

An exchange of income streams in which the stream of floating interest-rate payments is made periodically, as it would be in a plain vanilla swap, but the stream of fixed-rate payments is made as one lump-sum payment when the swap reaches maturity instead of periodically over the life of the swap. The amount of the fixed-rate payment is based on the swap's zero coupon rate.

BREAKING DOWN 'Zero Coupon Swap'

Variations of the zero coupon swap exist to meet different investment needs. A reverse zero-coupon swap pays the lump-sum payment when the contract is initiated, reducing credit risk for the pay-floating party. An exchangeable zero-coupon swap can use an embedded option to turn the lump-sum payment into a series of payments. It is also possible for the floating-rate payments to be paid as a lump sum in a zero-coupon swap.

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RELATED FAQS
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    Occasionally, a company will need to undergo some financial restructuring to better position itself for long term success. ... Read Full Answer >>
  2. How can I use an "airbag swap"?

    An airbag swap is an interest rate swap designed to provide a cushion against rising interest rates. The airbag swap originally ... Read Full Answer >>
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    An interest rate swap involves the exchange of cash flows between two parties based on interest payments for a particular ... Read Full Answer >>
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    Traders roll over futures contracts to switch from the front month contract that is close to expiration to another contract ... Read Full Answer >>
  5. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
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