A Zero-Coupon Swap is a type of financial instrument that allows two parties to exchange a fixed rate of return for a floating rate of return. In a zero-coupon swap, one party pays a fixed rate of return to the other party, and in return, the other party pays a floating rate of return, which is based on a benchmark rate such as the London Interbank Offered Rate (LIBOR) or the Euro Interbank Offered Rate (EURIBOR). The floating rate of return is determined at periodic intervals, such as every three months, and the payments are made at the end of each period.Zero-coupon swaps are commonly used as a way to hedge against interest rate risk, as the fixed rate party can protect itself against rising interest rates by locking in a fixed rate of return.On the other hand, the floating rate party can benefit from declining interest rates, as the benchmark rate decreases, and the floating rate payments it receives increase.It's important to note that zero-coupon swaps can be subject to various risks, such as market risk, credit risk, and counterparty risk.Additionally, zero-coupon swaps can be complex financial instruments, and a thorough understanding of the terms and conditions is required before entering into a zero-coupon swap. As with any investment, it's important to thoroughly understand the risks and to consult with a financial advisor before investing in a zero-coupon swap or any other investment.
