medium · FRM Part 1 Financial Markets and Products
How does the valuation of a swap as a portfolio of Forward Rate Agreements (FRAs) differ from its valuation as a pair of bonds?
- The FRA approach uses the spot rate for discounting, while the bond approach uses the internal rate of return.
- The bond approach is only valid at inception, while the FRA approach is used for mark-to-market.
- The FRA approach requires the exchange of principal at maturity, whereas the bond approach does not.
- The bond approach values the entire stream of cash flows, while the FRA approach values each exchange period individually.
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