In a total return swap, which payment is made by one party?

In a total return swap, which payment is made by one party?

• A. A fixed interest rate
• B. The total increase in the value of a bond
• C. A floating rate based on market conditions
• D. Variable payments from an asset

Answer: (B)

In a total return swap, one party pays the total return of an asset, which includes both income generated from that asset (like interest or dividends) and any capital appreciation or depreciation in its value. Therefore, the correct answer, which identifies this payment as "the total increase in the value of a bond," accurately reflects that the party in the swap is responsible for providing the total return associated with the underlying asset, capturing both the ongoing cash flows and the change in the market value over the duration of the swap agreement. This structure allows the other party to receive a stable income stream or exposure to the asset's performance without actually holding the asset itself, which can be particularly useful for hedging or speculative purposes. The other options do not fully represent what is meant by the total return payment in the context of this type of financial instrument.

In a total return swap, one party pays the total return of an asset, which includes both income generated from that asset (like interest or dividends) and any capital appreciation or depreciation in its value. Therefore, the correct answer, which identifies this payment as "the total increase in the value of a bond," accurately reflects that the party in the swap is responsible for providing the total return associated with the underlying asset, capturing both the ongoing cash flows and the change in the market value over the duration of the swap agreement.

This structure allows the other party to receive a stable income stream or exposure to the asset's performance without actually holding the asset itself, which can be particularly useful for hedging or speculative purposes. The other options do not fully represent what is meant by the total return payment in the context of this type of financial instrument.