When an interest-only swap is established on an amortizing basis,
A)the debt service exchanges decrease periodically through time as the hypothetical notational principal is amortized.
B)the debt service exchanges are the same each year,but the level of interest and principal changes as the loans amortize.
C)there is no such thing as an amortizing interest-only swap.
D)none of the options

Question

Quizplus · Accepted Answer

An interest-only swap refers to a swap agreement in which one party pays only the interest payments on a loan, while the other party makes the principal and interest payments on the loan. When this type of swap is established on an amortizing basis, the debt service exchanges decrease periodically through time as the hypothetical notational principal is amortized. This means that the payments from both parties will gradually decrease over time as the loan amortizes. Therefore, choice A is the best answer.

When an Interest-Only Swap Is Established on an Amortizing Basis