What is the interest rate rating?
The interest rate is an agreement between two parties to exchange cash flows resulting from interest on loans that are similar to the amount, but differ in other terms. A typical interest rate swap may be an agreement between one party, which took a loan with a variable interest rate and the other, which has a loan with a fixed interest. Interest valuation with rates exchange at a certain time is the difference in the current value of two future income flows. This value will be an asset for one of the parties and responsibility after another. For example, companies that have a high rating loan can have a comparative advantage in raising long -term funds for fixed rates. Therefore, the debtor who has a lower credit rating could wish to close a loan with a variable rate and enter the interest rate to achieve the security of cash flows into the future. Payments are the difference in the amount of interest due from loans. ProvThe party with a greater obligation to the party with less obligation on the basis of a net difference in the amounts due.
Interest rate Swap valuation at any point can be found by comparing the current value of two legs of interest rate. For example, at an interest rate consisting of a fixed -up foot and floating rates, future amounts and fixed rate payments are known. The current value of payments from a fixed -rate loan can therefore be calculated from available data.
Future payments from the variable storage rate are not known because it depends on future movements in the shape of the loan. However, the interest rates presented in relation to a loan with a variable rate can be derived by means of a yield curve in relation to the loan. The yield curve is a graph showing the interest rate on the loan at different periods to the maturity of the loan, calculated on the basis of market data. Using the future current of payments calculated usingThese handover rates can be calculated by the current value of the income flow from the loan with a variable rate.
The final step in the evaluation of the interest rate is to compare the current value of two legs of the loan. The difference between the two is the current value of the interest rate swap. This interest rate evaluation will be included in the financial statements as a responsibility for one of the parties and the asset for the other side.