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Credit derivatives terminology

By Vinod Kothari

 

 

Total rate of return swap: A credit derivative transaction where a person, presumably but not necessarily holding an obligation or portfolio of assets, swaps the total return including interest, capital appreciation/depreciation etc. from the obligation or portfolio, against a return based on a certain base rate plus a spread. For example, if the actual total return from a loan is swapped against a LIBOR-based return, the total return payer (compared to protection buyer) periodically transfers the actual return from the loan to the total return receiver (compared to protection seller), and the latter keeps paying LIBOR+ pre-fixed return.

 

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