def. Overnight Index Swap (Is) is a type of Interest rate swaps that isn’t backed by any bond; two parties just decide to swap the two rates:
- floating leg: Basis Rate, the overnight rates
- fixed leg: both parties agree, ¶5% 5% of what? Both agree on a notional amount, which is a hypothetical principal amount.
Use in Hedging Bonds
- Hold a fixed rate 5% (=fixed coupong) bond of principal $100
- Enter into