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 above

Question

Quizplus · Accepted Answer

When an interest-only swap is established on an amortizing basis, the hypothetical notional principal is amortized over time, leading to a decrease in debt service exchanges periodically. This means that the interest and principal exchanged between the parties will gradually decrease as the notional amount is amortized. Therefore, option A is the correct answer. Option B is incorrect because it suggests that the debt service exchanges are constant, which is not the case in an amortizing interest-only swap. Option C is incorrect because amortizing interest-only swaps do exist. Option D is not the correct answer as option A is correct.

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