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Zero Coupon Swap

An interest rate swap in which the floating rate payments are made periodically while the fixed rate payments are paid in a single, lump sum payment. Normally, the lump sum payment is made when the contract matures. But it can be made at the beginning of the contract in which case it would be known as a reverse zero coupon swap. If the lump sum payment is deferred until maturity the present value of the payment is normally adjusted to reflect the greater credit risk involved. Zero coupon swaps can be structured so that both floating and fixed rate payments are paid as a lump sum.