This is the second in a series of articles that will go from the basics about interest rate swaps, to how to value them and how to build a zero curve.
 Introduction to Interest Rate Swaps
 Fixed legs
 Floating legs
 Swap Curve building Part I
 Swap Curve building Part II
Interest Rate Swap Fixed Legs
Now that we know the basic terminology and structure of a vanilla interest rate swap we can now look at constructing our fixed leg of our swap by first building our date schedule, then calculating the fixed coupon amounts.
For our example swap we will be using the following inputs:
 Notional: $1,000,000 USD
 Coupon Frequency: SemiAnnual
 Fixed Coupon Amount: 1.24%
 Floating Coupon Index: 6 month USD LIBOR
 Business Day Convention: Modified Following
 Fixed Coupon Daycount: 30/360
 Floating Coupon Daycount: Actual/360
 Effective Date: Nov 14, 2011
 Termination Date: Nov 14, 2016
 We will be valuing our swap as of November 10, 2011.
Swap Coupon Schedule
First we need to create our schedule of swap coupon dates. We will start from our maturity date and step backwards in semiannual increments. The first step is to generate our schedule of nonadjusted dates.
Then we adjust our dates using the modified following business day convention.
Note that all the weekend coupon dates have been brought forward to the next Monday.
Swap Fixed Coupon Amounts
To calculate the amount for each fixed coupon we do the following calculation:
Fixed Coupon = Fixed Rate x Time x Swap Notional Amount
Where:
Fixed Rate = The fixed coupon amount set in the swap confirmation.
Time = Year portion that is calculated by the fixed coupons daycount method.
Swap Notional = The notional amount set in the swap confirmation.
Below is our date schedule with the Time portion calculated using the 30/360 daycount convention. More on daycounts can be found in this document titled Accrual and Daycount conventions.
Note the coupons which are not exactly a halfyear due to the business day convention. If our business day convention was noadjustment all the time periods would have been 0.5. This is a difference between swaps and bonds, as bonds will generally not adjust the coupon amounts for business day conventions, they will simply be 1/(# coupon periods per year) x coupon rate x principal.
The coupon amount for our first coupon will be 1.24% x 1,000,000 x 0.50 = $6,200.00. Below are the coupon amounts for all of the coupons.
Now that we know our coupon amounts, to find the current fair value of the fixed leg we would present value each coupon and sum them to find the total present value of our fixed leg. To do this we calculate the discount factor for each coupon payment using a discount factor curve which represents our swap curve. We will build our discount factor curve later in this tutorial series.
Next Article: Swap floating legs including calculating forward rates.
For more information see our pricing plans.
