What is a 'Plain Vanilla Swap'

A plain vanilla swap is one of the simplest financial instruments contracted in the over-the-counter market between two private parties, both of which are usually firms or financial institutions. While there are several types of plain vanilla swaps, including an interest rate swap, commodity swap and a foreign currency swap, the term is most commonly used to describe an interest rate swap in which a floating interest rate is exchanged for a fixed rate or vice versa.

BREAKING DOWN 'Plain Vanilla Swap'

A plain vanilla interest rate swap is often done to hedge a floating rate exposure, although it can also be done to take advantage of a declining rate environment by moving from a fixed to a floating rate. Both legs of the swap are denominated in the same currency, and interest payments are netted. The notional principal does not change during the life of the swap, and there are no embedded options.


In a plain vanilla interest rate swap, Company A and Company B choose a maturity, principal amount, currency, fixed interest rate, floating interest rate index, and rate reset and payment dates. On the specified payment dates for the life of the swap, Company A pays Company B an amount of interest calculated by applying the fixed rate to the principal amount, and Company B pays Company A the amount derived from applying the floating interest rate to the principal amount. Only the netted difference between the interest payments changes hands.

Floating Rate

The most common floating rate index is the London Interbank Offered Rate (LIBOR), which is set daily by the International Commodities Exchange (ICE}. LIBOR is posted for five currencies: the U.S. dollar, euro, Swiss franc, Japanese yen and British pound. Maturities range from overnight to 12 months. The rate is set based on a survey of between 11 and 18 major banks.

Payment Period

The most common floating rate reset period is every three months, with semi-annual payments. The day count convention on the floating leg is generally actual/360, for the U.S. dollar and the euro, or actual/365, for the British pound, Japanese yen and Swiss franc. The interest on the floating rate leg is accrued and compounded for six months, while the fixed rate payment is calculated on a simple 30/360 or 30/365 basis, depending on the currency. The interest due on the floating rate leg is compared with that due on the fixed rate leg, and only the net difference is paid.

  1. Asset Swap

    Similar in structure to a plain vanilla swap, the key difference ...
  2. Swap Rate

    The rate of the fixed portion of a swap as determined by its ...
  3. Plain Vanilla

    The most basic or standard version of a financial instrument, ...
  4. Bond Market Association (BMA) Swap

    A type of swap arrangement in which two parties agree to exchange ...
  5. Delayed Rate Setting Swap

    An exchange of cash flows, one of which is based on a fixed interest ...
  6. Floating Price

    The leg of a swap that is based on a fluctuating interest rate. ...
Related Articles
  1. Trading

    An Introduction To Swaps

    Learn how these derivatives work and how companies can benefit from them.
  2. Investing

    What's an Interest Rate Swap?

    An interest rate swap is an exchange of future interest receipts. Essentially, one stream of future interest payments is exchanged for another, based on a specified principal amount.
  3. Trading

    How Are Interest Rate Swaps Valued?

    When trading in financial markets, higher returns are generally associated with higher risk. Hedge your risk with interest rate swaps.
  4. Managing Wealth

    An In-Depth Look At The Swap Market

    The swap market plays an important role in the global financial marketplace; find out what you need to know about it.
  5. Trading

    Interest Rate Swaps Explained

    Plain interest rate swaps that enable the parties involved to exchange fixed and floating cash flows.
  6. Trading

    Different Types of Swaps

    Investopedia explores the most common types of swap contracts.
  7. Investing

    How To Read Interest Rate Swap Quotes

    Puzzled by interest rate swap quotes terminology? Investopedia explains how to read the interest rate swap quotes
  8. Trading

    Currency Swap Basics

    Find out what makes currency swaps unique and slightly more complicated than other types of swaps.
  9. Trading

    Hedging With Currency Swaps

    The wrong currency movement can crush positive portfolio returns. Find out how to hedge against it.
  10. Investing

    What Does Plain Vanilla Mean?

    Plain vanilla is a term used in investing to describe the most basic types of financial instruments.
  1. What are interest rate swaps on the OTC market?

    Learn about interest rate swaps and how they are traded over the counter, and understand the impact of Dodd-Frank on swaps ... Read Answer >>
  2. How do companies benefit from interest rate and currency swaps?

    An interest rate swap involves the exchange of cash flows between two parties based on interest payments for a particular ... Read Answer >>
  3. Do interest rate swaps trade on the open market?

    Learn how interest rate swaps are traded on the OTC and interbank markets, and how these swaps can be used to arbitrage different ... Read Answer >>
  4. Can individual investors profit from interest rate swaps?

    Find out how individual investors can speculate on interest rate movements through interest rate swaps by trading fixed rate ... Read Answer >>
  5. What is an absolute rate?

    An absolute rate is easy to understand once you know the basics of an interest rate swap. An absolute rate is the fixed rate ... Read Answer >>
  6. What would motivate an entity to enter into a swap agreement?

    Learn why parties enter into swap agreements to hedge their risks, and understand how the different legs of a swap agreement ... Read Answer >>
Hot Definitions
  1. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  2. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  3. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  4. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  5. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  6. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
Trading Center