Why Is the Credit Risk on a Plain Vanilla Interest

question 63

Essay

Why is the credit risk on a plain vanilla interest rate swap generally less than the credit risk of a loan with an equivalent (notional)principal amount?

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Definitions:

Coupon Interest Rate

The annual interest rate paid on a bond, expressed as a percentage of the face value, paid from issuer to bondholder.

Straight Bonds

Debt securities issued by corporations or governments that pay periodic interest payments and return the principal amount at maturity without any special features such as convertibility or callability.

Special Purpose Vehicles

Legal entities created for a specific purpose, often to isolate financial risk by segregating certain assets or activities.

Mortgage Securitization

The process of pooling various mortgage loans into a single security which investors can purchase.