I understand the mechanics of calculating the value of a interest-rate swap, when viewed as an exchange of fixed-rate and floating-rate payments. I also understand the cash-flows coming out of the fixed-rate payer.

Using the Example 7.2 in Hull's book: every 6 months, discount the coupon payment to the present value; using the LIBOR spot rates at 3, 9 and 15 month intervals as the corresponding risk-free rate.

What

**I don't understand**is the rationale behind the computation of the floating-payer's payments:

I see that we compute this as:

[ notional + immediate-next-period-floating-payment] * exp( - r1*t1)

I am sorely missing something. Two questions:

1. Just like in the fixed-rate cash flow, why are we not computing the cash-flows for all 3 periods and then discount the notional at the risk-free rate corresponding to the 15-month rate.

2. I am not able to explain to myself the "rationale" behind why the floating-cash flow

*not*mirror the fixed one? Again, looking at Table 7.2 on page 162 of Hull -- why do we have 3 cash flows for the fixed-rate-payer and only one for the float-rate-payer?

What makes the simplified floating cash-flow possible?

In contrast, I can easily see the rationale of the two sets of cash-flows when computing the swap value as a series of FRAs....

--sridhar