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termination date. The termination date is the date on which the
last payment is due. The termination date sets the maturity of
the contract.
3. Different Types of Interest Rates
Swaps generally involve two types of interest rates. The
first rate, a fixed interest rate, is applied for each payment
date to ascertain the agreed-upon payment in the fixed leg. By
definition, the fixed interest rate is fixed in that it is
constant. The second rate, a floating interest rate, is applied
for each payment to ascertain the agreed-upon payment in the
floating leg. By definition, the floating interest rate floats
in accordance with an agreed-upon index and usually changes with
time.
The date on which the floating interest rate is changed
(i.e., is “reset”) is known as the reset date. Except in the
case of the first payment, the floating interest rate applicable
to each payment period is generally set at the beginning of the
interval, on the basis of the interest rate in effect 2 business
days before the most recent reset date. The floating interest
rate applicable to the first payment is generally set on the
trade date, 2 days before the effective date.
4. Use of LIBOR as a Floating Interest Rate Index
The most common floating interest rate index for interest
rate swaps is the London Interbank Offering Rate (LIBOR), the
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