Swap Parameters
Key Concepts
Swap Breakage:
The cost (or gain) to terminate an interest rate swap before maturity. Equal to the NPV of the difference between original and current fixed rates.
Fixed-Rate Payer:
This calculator assumes the Project Company pays fixed and receives floating. If rates fall, you owe money (out of the money); if rates rise, you receive money (in the money).
Mark-to-Market:
The theoretical value of the swap at any point. MTM to swap provider = breakage cost to Project Company.
Results
Breakage Cost
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Calculating...
Cost to Project Company
MTM to Swap Provider
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% of Initial Notional
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Calculation Summary
Breakage = NPV of (Original Rate - Current Rate) x Notional / Frequency
Per-Period Breakdown
| Period | Year | Notional | Difference | DF | PV |
|---|---|---|---|---|---|
| Total Breakage Cost | - | ||||
Model Assumptions
- Project Company is the fixed-rate payer; sign reverses for receiver swaps
- Breakage = NPV of fixed-rate differential over remaining term (Yescombe Tables 10.9/10.10)
- Current rate used as both replacement swap rate and discount rate (flat curve)
- Breakage occurs at a payment/reset date (no accrued interest or stub periods)
- Day count simplified as 1/frequency (ignores actual/360, business-day conventions)
- Ignores bid/offer spreads, CVA/FVA, and swap provider margin
- Floating leg assumed to reset at par
For educational purposes. Not financial advice. Actual termination quotes may differ.
Frequently Asked Questions
Swap breakage cost is the amount owed (or received) when terminating an interest rate swap before its scheduled maturity. It equals the net present value of the difference between your original fixed rate and current market rates, calculated over the remaining swap term.
Breakage cost is calculated by: (1) determining the payment difference for each remaining period as (Original Rate - Current Rate) x Notional / Frequency, (2) discounting each payment difference to present value using the current market rate, and (3) summing all present values.
A swap break creates a cost when market rates have fallen below your original fixed rate. A swap break creates a gain when market rates have risen above your original rate.
From the Project Company's perspective: A swap is in the money when terminating it would result in receiving a payment (market rates rose). A swap is out of the money when terminating it would require making a payment (market rates fell).
Swap breakage is critical because: (1) it represents a real cash cost or benefit during refinancing, prepayment, or default, (2) it's a credit risk exposure that swap providers factor into pricing, and (3) the amount can be material - potentially 15% or more of the initial notional.
An amortizing notional schedule significantly reduces breakage compared to a bullet structure. Later periods have smaller notional amounts, reducing payment differences even though the discounting effect is greater.
Swap breakage is discounted at the current market (replacement swap) rate for the remaining term. The discount rate is applied on an end-of-period basis.
Yes - swap breakage cost is essentially the theoretical mark-to-market (MTM) value of the swap at termination. Note that actual bank termination quotes may include bid/offer spreads, accrued interest, and credit adjustments.
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