We compare your existing Contract Fixed Rate against the Current Market Swap Rate for the remaining term. The difference is the "coupon saving/loss", which is then discounted to present value using the annuity factor of the remaining stream.
Usage of this Calculator
Uses for corporates and banks
Corporate Borrowers
Companies with floating-rate debt use swaps to "fix" their interest payments. This calculator values that position to see if it's an asset or liability.
Pension Funds
Funds receiving fixed coupons may swap to floating rates if they believe interest rates will rise (duration management).
Real Estate Developers
Developers often use swaps to convert variable construction loans into fixed-rate long-term financing certainty.
Auditors & Analysts
Independently verify the "Mark-to-Market" value of off-balance-sheet derivatives reported by firms.
Summary
The Swap Valuation Calculator provides a "quick and dirty" Mark-to-Market (MtM) check using the flat-curve method.
It helps Payer and Receiver counterparties understand who is currently "winning" the trade based on new market rates.
It quantifies the cash amount required to unwind or terminate the agreement today.
It highlights the sensitivity of the swap's value to small changes in interest rates (DV01 risk).
A Plain Vanilla Interest Rate Swap is an agreement between two parties to exchange cash flows on a defined Notional Amount.
Party A (Payer): Pays a Fixed Rate and receives a Floating Rate (e.g., SOFR).
Party B (Receiver): Receives a Fixed Rate and pays a Floating Rate.
Note: The principal (notional) is never exchanged, only the interest payments.
How Valuation Works
At the moment a swap is signed (Inception), the value is typically Zero. The fixed rate is chosen such that the Present Value (PV) of the Fixed Leg equals the PV of the Floating Leg.
As time passes and interest rates change, value emerges:
If market rates Rise, the Payer (who locked in a lower fixed rate) gains value. The Receiver loses value.
If market rates Fall, the Payer (who is paying a high fixed rate) loses value. The Receiver gains value.
The "Difference in Rates" Method
While professional systems discount every single cash flow curve, a robust method for quick valuation is determining the value of the difference between the contract rate and the current market rate.
Value = (R_market - R_contract) × Annuity Factor × Notional
The Annuity Factor represents the sum of discount factors for all remaining payment dates. It tells you "What is the present value of receiving $1 per year for the remaining life of the swap?"
Fixed Leg vs. Floating Leg
Alternatively, you can value legs separately.
Floating Leg Value
Interestingly, on a reset date, the value of the Floating Leg is always equal to Par (100%). Why? Because the floating rate resets to the market rate, so it is always "fairly priced" at that moment.
Fixed Leg Value
The Fixed Leg behaves like a fixed-coupon bond. If rates rise, the bond price falls. If rates fall, the bond price rises.
Therefore: Payer Swap Value ≈ Floating Leg (Par) - Fixed Leg Bond Value.
Who Uses Swaps?
Corporate Borrowers
Companies with variable-rate loans use swaps to "fix" their interest rate expenses, neutralizing the risk of rising rates.
Pension Funds
Funds receiving fixed income might swap to floating to reduce duration risk if they expect rates to rise.
Frequently Asked Questions
Common questions about Swap Valuation
Why is the calculation approximate?
This calculator uses a single discount rate (flat yield assumption) for simplicity. Institutional valuation uses a separate zero-coupon curve (to discount) and a forecasting curve (to project floating rates), often OIS-discounting.
What happens at maturity?
At maturity, all obligations are settled. The final exchange of interest occurs, and the contract terminates. The value converges to zero.
Does Notional Amount change hands?
No. In a plain vanilla Interest Rate Swap, the notional principal is never exchanged. It is only used to calculate the interest payments. This minimizes counterparty risk compared to a loan.
What is "DV01"?
DV01 (Dollar Value of an 01) measures the change in the swap's value for a 1 basis point (0.01%) change in interest rates. It is a key risk metric.
Can I make money on a swap?
Yes. If you are a Payer (Paying Fixed) and rates rise, your swap becomes an asset. You are paying e.g. 3% when the market is demanding 5%. You can sell (assign) this contract for a profit.
What is LIBOR vs SOFR?
LIBOR was the old standard floating rate. SOFR (Secured Overnight Financing Rate) is the new standard (since 2023) for USD swaps. SOFR is risk-free, while LIBOR included bank credit risk.
How do I exit a swap?
You can terminate it with the dealer at market value (Cash Settlement) or enter an offsetting swap (e.g., if you Pay Fixed, you enter a new Receive Fixed swap).
What is a "Basis Swap"?
A swap where both legs are floating but pegged to different indices (e.g., 3-month SOFR vs 1-month SOFR).
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Estimate current value of an interest rate swap using fixed/floating rates, notional, and discount factors.
How to use Swap Valuation (Plain Vanilla Interest Rate Swap) Calculator
Step-by-step guide to using the Swap Valuation (Plain Vanilla Interest Rate Swap) Calculator:
Enter your values. Input the required values in the calculator form
Calculate. The calculator will automatically compute and display your results
Review results. Review the calculated results and any additional information provided
Frequently asked questions
How do I use the Swap Valuation (Plain Vanilla Interest Rate Swap) Calculator?
Simply enter your values in the input fields and the calculator will automatically compute the results. The Swap Valuation (Plain Vanilla Interest Rate Swap) Calculator is designed to be user-friendly and provide instant calculations.
Is the Swap Valuation (Plain Vanilla Interest Rate Swap) Calculator free to use?
Yes, the Swap Valuation (Plain Vanilla Interest Rate Swap) Calculator is completely free to use. No registration or payment is required.
Can I use this calculator on mobile devices?
Yes, the Swap Valuation (Plain Vanilla Interest Rate Swap) Calculator is fully responsive and works perfectly on mobile phones, tablets, and desktop computers.
Are the results from Swap Valuation (Plain Vanilla Interest Rate Swap) Calculator accurate?
Yes, our calculators use standard formulas and are regularly tested for accuracy. However, results should be used for informational purposes and not as a substitute for professional advice.