Swap P&L and Valuation
Once rates move after signing, the swap's value changes. Drag the rate and see whether the payer or the receiver comes out ahead.
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Text version · Interest Rates & Swaps, lesson 4: “Swap P&L and Valuation”
Once rates move after signing, the swap's value changes. Drag the rate and see whether the payer or the receiver comes out ahead.
When rates move, one side wins and the other loses
If market rates rise after signing, the fixed payer only pays the old low rate but receives higher floating interest, so the swap gains value; the fixed receiver loses exactly the same amount: zero-sum.
Value = present value of the remaining differences
Discount each remaining period's interest difference to today's present value and add them up. Pay one period, lose one period; at maturity the value is zero.
The longer the maturity, the bigger the swings
If rates rise 1%, the fixed payer makes $100,000 more each year; with 1 year left that's worth about $95,000, with 5 years left about $430,000. The more periods remaining, the more value the same rate move adds up to.
Key takeaways
- Rates rise: the swap gains value for the fixed payer and loses value for the fixed receiver.
- Swap value ≈ (market rate − fixed rate) × principal for each remaining period, discounted and summed.
- The longer the remaining term, the bigger the value change for the same rate move. At maturity the value goes to zero.
- Interest rate swaps are zero-sum: one side's gain is the other side's loss.
Try it yourself
You can do these exercises in this lesson's interactive simulation:
- Click “Day of signing”: market rate = fixed rate of 4%, so what are the payer's and receiver's values?
- Click “Rates rise to 6%”: if you're the receiver (receiving fixed), is the swap value now positive or negative?
- Drag the market rate to 1%, then to 7%: which side's value changes more? See why the curve bends.
- Keep 6% and press ▶ to let time pass: as each period is paid, how do the “Payer value” and the “Sum of discount factors” change? What are they at maturity?
Quiz and explanations
- 1. You're the side receiving the fixed rate (receiver), and market rates rise sharply. Your swap's value…
- Answer: Falls.The fixed rate you receive is now a worse deal.
- 2. At signing, a swap's value is usually close to…
- Answer: 0.The fixed rate is set at a fair level, so neither side is worse off.
- 3. On $10 million notional with 3 years left, you pay fixed 4%. The market swap rate rises to 5%. Ignoring discounting, roughly what's the swap worth?
- Answer: +$300,000.You gain 1% × $10 million = $100,000 a year, about $300,000 over the remaining 3 years (about $270,000 after discounting). The payer makes money.
Terms in this lesson
- payer swap (Payer): The side of a swap that pays fixed and receives floating, which gains when rates rise.
- present value (Present Value): What a future amount of money is worth today after discounting at an interest rate.
- receiver swap (Receiver): The side of a swap that receives fixed and pays floating, which gains when rates fall.