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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.