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:

Capital Investment

Funds invested in a business with the expectation of future returns, often in the form of physical assets or capital expenditures.

Recovery

The process of regaining possession or control of something stolen or lost, or the process of returning to a normal state of health, mind, or strength.

Average Rate

A value derived by dividing the sum of several rates by the number of rates, often used in financial calculations.

Capital Budgeting

The process of making investment decisions in long-term assets and projects.