How does a fixed-for-floating swap actually pay out?
The interest rate swap is the workhorse of the whole derivatives world by notional outstanding. Its mechanics are entirely arithmetic, and once you can build the payment schedule by hand, the contract stops being mysterious.
The vocabulary you need
- Payer — the side that pays fixed and receives floating. (The name always refers to the fixed leg.)
- Receiver — the side that receives fixed and pays floating.
- Swap rate — the fixed rate, set at the start so that neither side owes the other anything up front.
- Reference rate — the floating benchmark, and the two kinds settle differently. A term rate — the LIBOR-style convention, still used in some markets — fixes at the start of each period and pays at the end. An overnight rate such as SOFR or €STR is compounded daily through the period, so the rate is not known until the period ends: set in arrears, paid in arrears. The benchmark reforms that replaced the term rates made this one of the concrete changes to how the dominant swap actually settles. The convention changes when you learn the number, not the arithmetic below.
- Day count — the convention (30/360, ACT/360, ACT/365) that turns an annual percentage into a period amount. It nudges the numbers by a fraction of a percent; the worked example below uses clean annual periods to keep the shape visible.
A worked cashflow schedule
A company enters a 3-year, $10,000,000 notional swap, paying 4.00% fixed annually and receiving the floating reference rate. The fixed leg is the same every year: $10,000,000 × 4.00% = $400,000.
Suppose the floating rate fixes at 3.00%, then 4.50%, then 5.50%:
| Year | Fixed paid | Floating rate | Floating received | Net to the fixed payer |
|---|---|---|---|---|
| 1 | $400,000 | 3.00% | $300,000 | −$100,000 |
| 2 | $400,000 | 4.50% | $450,000 | +$50,000 |
| 3 | $400,000 | 5.50% | $550,000 | +$150,000 |
| Total | $1,200,000 | — | $1,300,000 | +$100,000 |
Three points worth pausing on:
- Only the net moves. In year 1, one payment of $100,000 is made — not a $400,000 payment crossing a $300,000 payment.
- The $10,000,000 never moves. Not at the start, not at the end.
- The outcome was unknown at signing. Nobody knew the fixings. Year 1 cost the fixed payer money; years 2 and 3 paid it back. Had rates fallen instead, all three years would have been losses. A swap doesn't create a good outcome — it converts an uncertain cashflow into a certain one, and the certainty has a price.
Why the fixed rate starts "fair"
The swap rate is chosen so the present value of the expected floating payments equals the present value of the fixed payments. At inception, the contract is worth approximately zero to both sides. That's what makes it a clean exchange rather than a purchase — and it's also why the value doesn't stay at zero for a single day afterwards, which is the next lesson.
In the data
The floating leg's index is a real published daily rate. For dollars it is SOFR; sterling uses SONIA and the euro €STR. Three years of it are below, read on the first business day of 2024, 2025 and 2026.
What you are reading is the benchmark's own history, not any swap's payments. Which days' values feed which payment, compounded over which period and with what lag, is a convention written into each contract, so two swaps on the same benchmark can pay different amounts on the same date while the published series shows one number for both.
Try it now
Take the three fixings above as your floating rates for years 1, 2 and 3.
Rebuild the table above with those real fixings against a 4.00% fixed rate on $10,000,000. Would the fixed payer have come out ahead or behind?
Now redo the total with the fixed rate at 5.00% instead. Notice that the answer flips entirely on a number chosen at signing — the fixed rate is the whole negotiation.