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In lieu of a LIBOR rate, the parties to an interest rate
swap may agree to use a less common floating interest rate index.
Other common floating interest rate indices during the relevant
years included the T-bill rate (the rate on the most recent issue
of U.S. Treasury bills), the commercial paper rate, the bankers
acceptance rate, the prime rate, and the tax-exempt rate.
5. Plain Vanilla Interest Rate Swaps
Interest rate swaps may be of the plain vanilla type. A
plain vanilla interest rate swap, the simplest and most common
type of interest rate swap, is a swap with standard terms and
without another financial derivative as part of the agreement.
One party to a plain vanilla interest rate swap (first party)
agrees to pay to the other party (second party) amounts equal to
a fixed rate of interest multiplied by a set notional amount.
The second party agrees to pay to the first party amounts equal
to a floating rate of interest multiplied by the same notional
amount. The fixed and floating amounts are offset against each
other as of each payment date, and the party paying the higher
rate of interest remits a payment to the counterparty equal to
the notional amount multiplied by the difference between the
interest rates. An analogy of a plain vanilla interest rate swap
is the exchange of a fixed-rate loan for a floating-rate loan.
The schedule of payments on a plain vanilla interest rate swap
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