Definition

In the case of a compound swap, the interest is capitalized and paid out during and / or at the end of the term. Whether or not the nominal amounts are swapped in the process is of no significance.

Prerequisites

As is the case with all swaps, the interest rate flows for a compound swap are generated according to the interest rate conditions.

In order to create a compound interest effect, you must select an interest rate condition with condition category 15 (interest capitalization) in Customizing.

The interest payment is entered as an independent time sequence. A flow is generated for each capitalized interest payment to pay the interest accrued to date, irrespective of whether this interest was already added to the nominal amount or not. Interest payment dates should therefore always coincide with interest capitalization dates.

Structure

Creating a compound swap

As soon as you select an interest rate condition with condition category 15 (interest capitalization) – either by presetting the data or by choosing the condition from the detail view – the pushbutton Condition Details ) appears on the tab page.

You can use this to enter a time sequence for paying capitalized interest. You should ensure, however, that the payment dates always coincide with the interest capitalization dates. Otherwise, this will affect the nominal capital, as due interest amounts will be paid that have not been capitalized. When you save your entries, the data is checked by the system. A warning message appears if inconsistencies are found.

Another available feature is the Eonia Swap , a special type of compound swap.