Interest Rate Swaps, swap the payments, never the principal
Two parties exchange fixed for floating interest on a notional. Only the net moves each period, the notional never does, and the swap starts at zero value.
A 2.5 minute animated lesson on the vanilla interest rate swap. Built for FIN301 students at Western Sydney University meeting swaps for the first time.
Two parties exchange interest on a notional principal. One pays a fixed rate, the other pays a floating rate such as 3-month BBSW, and only the net difference changes hands each period. A worked A$10 million example shows it. With BBSW at 4.50% against a 5% fixed leg, one side pays A$12,329 for the period, and when BBSW resets to 5.75% the flow reverses.
The lesson closes on the two ideas that trip students up. The notional is never exchanged in a vanilla single-currency swap, it is only a scaling factor, and the fixed rate is set so the swap is worth zero to both sides at the start. Citations to Hull (2022), the BIS, and ISDA sit on the Atlas concept page.