Setting up a Synthetic Fixed Rate (Swap)
By Robert Caplan
Jun 20, 2006, 09:41
Setting up a Synthetic Fixed Rate (Swap):
You can use Munex to model a swap, in which you issue variable rate bonds and
enter into an agreement to swap your variable rate obligation in exchange for
paying a fixed rate.
To set up a swap in Munex, go to Input >> Scale, and set the type of
bond to VRDN to model your variable rate obligation. The swapping of
obligations can be shown using 2 LOC expenses, a negative variable rate expense
to show that the swap partner is paying your variable rate obligation, and a
fixed rate expense to show the other portion of the swap.
To model these expenses, go to Input >> Expenses, select Other
Expenses, and click Edit. Click Add, and define a new LOC expense called
Swap Fixed that will represent the fixed rate you are paying. Set the
expense basis to 100% of bond balance, click next and define the “Date payment
begins to accrue,” “First payment,” and “Final payment” according to the
specifics of the swap contract, typically paying a percentage of the bond
balance periodically to coincide with your interest payments. Put the
fixed rate in “Default ongoing payment as percent of basis.”
Once you have defined the Swap Fixed expense, create a second LOC expense
called Swap Variable Receipts. Define the expense basis to 100% of bond
balance, and click next to go to the Ongoing Payment Assumptions screen.
Set the “Default ongoing payment as percent of basis” to mirror the variable
rate on your bonds. So if your VRDN was 4%, set the default ongoing
payment to -4%. Also set the “Minimum Payment” to -9,999,999,999.00 to
tell Munex to allow negative expenses. You should also set the “Day count
Method” to Actual/Actual to mirror the day count on your VRDN bonds.
The negative variable rate expense will cancel out your VRDN interest, and
you will be left with the fixed rate expense.
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