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parties’ obligations.9 The parties to an interest rate swap
agree to exchange for a set length of time (term or tenor) and as
of specified intervals (payment schedule) streams of interest
payments ascertained on the basis of a notional principal amount.
At least one of these streams of payments is ascertained on the
basis of a floating-rate index. The respective streams of
payments are often referred to as “legs”; e.g., a fixed leg and a
floating leg.
The party that is paying the fixed rate (i.e., receiving the
floating rate) is said to have bought the swap.10 The party
receiving the fixed rate (i.e., paying the floating rate) is said
to have sold the swap. The party that is receiving the fixed
rate also is said to be “short” the swap, while the party paying
the fixed rate is said to be “long” the swap.11
The trade date is the date on which the swap transaction is
agreed. The effective date is the date on which the interest
included in the payments begins to accrue. Once interest has
begun to accrue, it continues to accrue until the day before the
9 Nor is the notional amount shown on either party’s balance
sheet.
10 The negotiated fixed rate is sometimes called the price
of the swap.
11 Assume, for example, that C agrees to pay to B a fixed
interest rate in return for B’s agreeing to pay to C an interest
rate that floats in accordance with a certain floating interest
rate index. C is the buyer of the swap (and is long on the
swap). B is the seller of the swap (and is short on the swap).
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