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determining the difference in the value of each of the swap’s
legs viewing the legs as if each of them was a bond bearing the
same attributes (e.g., identification of issuer, maturity,
interest rate) as the corresponding leg. In short, we view the
fixed leg as a bond the issuer of which is the fixed-rate payor
and the interest rate of which equals the fixed rate payable on
the swap. We view the floating leg as a bond the issuer of which
is the floating-rate payor and the interest rate of which is the
floating rate of interest. We consider the fair market value of
each swap to equal the difference between: (1) The price at
which a hypothetical willing buyer and a hypothetical willing
seller would agree to buy/sell the fixed leg and (2) the price at
which a hypothetical willing buyer and a hypothetical willing
seller would agree to buy/sell the floating leg.
We learn from Sziklay, generally speaking, that an interest
rate swap is analogous to two bonds.69 We learn from Duffie,
speaking more specifically, that a swap is simply an exchange of
a fixed-rate bond for a floating-rate bond of the same maturity,
both bonds bearing a face value equal to the notional principal
amount of the swap. We further learn from Duffie that a swap’s
69 Sziklay testified that the credit ratings of the issuers
must be taken into account when valuing the bonds. We agree. As
to each leg, its value to the payee equals the present value of
the payments due thereunder. Obviously, in determining this
value, one must take into account the creditworthiness of the
payor/issuer.
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