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exactly matches the schedule of net payments on an exchange of
the fixed- and floating-rate loans.
In contrast to a plain vanilla interest rate swap, a more
creative interest rate swap may have nonstandard terms.13 A
combination deal (sometimes, COMB) has embedded option features
such as a callable or extendable swap or a contract giving one of
the parties the option, but not the obligation, to enter into an
interest rate or currency swap at prearranged terms. An
amortizing or accreting swap has a notional amount that decreases
or increases, respectively, during the life of the transaction.14
A basis swap has two floating legs, instead of a fixed leg and a
floating leg, with each party agreeing to exchange payments
determined by a different floating-rate index (e.g., one party
floats with LIBOR while the other party floats with the
commercial paper rate). In some swaps, the payment dates for the
counterparties do not coincide, whereas in other swaps the
counterparties’ payments are in different currencies. There also
are swaps with different fixed rates during different periods.
13 The expression “structured swap” is used to capture any
swap with specially tailored features. Relatively new and
unfamiliar types of swaps are called “exotics”.
14 An amortizing swap mimics the fixed and floating interest
rate schedules on regular amortizing loans.
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