| Interest Rate Swap | IRS | IRS Plain Vanilla (Fixed-Float) | An agreement between two parties (known as counterparties) in which one party (the fixed rate payer) makes periodic payments (the fixed leg) to another party (the floating rate payer) based on a fixed rate of interest multiplied by a notional amount in exchange for receipt of periodic payments (the floating leg) based on a floating rate index multiplied by the same notional amount (in most cases) upon which the fixed rate payments are based.
For example, Party A enters into a five-year agreement with Party B in which Party A makes quarterly payments to Party B of 0.4% times $10,000,000 (the notional amount) and Party B makes quarterly payments to Party A of the 3 Month USD LIBOR rate times $10,000,000. Fixed-Float Swaps are commonly used when one party has taken out a variable rate loan and wishes to swap the variable rate payments for fixed rate payments. |