exchanged is based on the notional principal. In the most common type of swap, there is a fixed-rate payer and a fixed-rate receiver. The convention for quoting swap rates is that a swap dealer sets the floating rate equal to the reference rate and then quotes the fixed rate that will apply.   Computing the Payments for a Swap In the previous section we described in general terms the payments by the fixed-rate payer and fixed-rate receiver but we did not give any details. That is, we explained that if the swap rate is 6% and the notional amount is $100 million, then the fixed-rate payment will be $6 million for the year and the payment is then adjusted based on the fre- quency of settlement. So, if settlement is semiannual, the payment is $3 million. If it is quarterly, it is $1.5 million. Similarly, the floating-rate payment would be found by multiplying the reference rate by the notional amount and then scaling based on the frequency of settlement. It was useful to illustrate the basic features of an interest rate swap with simple calculations for the payments such as described above and then explain how the parties to a swap either benefit or hurt when inter- est rates change. However, we will show how to value a swap in this section. To value a swap, it is necessary to determine both the present value of the fixed-rate payments and the present value of the floating- rate payments. The difference between these two present values is the value of a swap. As will be explained below, whether the value is posi- tive (i.e., an asset) or negative (i.e., a liability) will depend on the party. At the inception of the swap, the terms of the swap will be such that the present value of the floating-rate payments is equal to the present value of the fixed-rate payments. That is, the value of the swap is equal to zero at its inception. This is the fundamental principle in determining the swap rate (i.e., the fixed rate that the fixed-rate payer will make).   2A question that commonly arises is why is the fixed rate of a swap is quoted as a fixed spread above a Treasury rate when Treasury rates are not used directly in swap valuation? Because of the timing difference between the quote and settlement, quot- ing the fixed-rate side as a spread above a Treasury rate allows the swap dealer to hedge against changing interest rates.     Here is a roadmap of the presentation. First we will look at how to compute the floating-rate payments. We will see how the future values of the reference rate are determined to obtain the floating rate for the period. From the future values of the reference rate we will then see how to compute the floating-rate payments taking into account the number of days in the payment period. Next we will see how to calculate the fixed- rate payments given the swap rate. Before we look at how to calculate the