Zeroes
Posted: August 19th, 2011, 4:23 pm
Hi All - can any one please explain me the use and significance of Zero Coupon Swap with accreted notionals ?I wanted to price a Zero with Funding Spread.Lets say my Treasury gives me 3m EURIBOR + 50 bps for 5yr. Now if I want par back at Maturity then I used to price as below;5y Discount Factor - (5y DV01 of Risk Free Swap)*(0.50%). This is equivalent to shifting the EURIBOR curve up by 50 bps and then discounting.However my treasury desk tells me that there are actually thre kinds of zeros.1. As priced above. (called Balloon zeros - which accrues int. and pays everything at the end)2. Upfront Zero ( dont know what this is).3. Accreted Notional Zero Swap. (which as I get is getting rate R on increasing Notionals).Can anyone please throw somelight on the differences between these , specifically the third one - why is that needed ?.I beleive by default everyone prices "Ballon" Zeros.Although I was not able to find anything on the Forum/articles/Google - kindly refer me to anything useful I may have missed.Thanks for your help.