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In interest rate swaps, each party agrees to pay either a fixed or a floating rate in a particular currency to the other party. The fixed or floating rate is multiplied with the Notional Principal Amount (NPA). This notional amount is not exchanged between the parties involved in the swap. This NPA is used only to calculate the interest flow between the two parties.

The most common interest rate swap is where one party 'A' pays a fixed rate to the other party 'B' while receiving a floating rate which is pegged to a reference rate like LIBOR.

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Q: What are interest rate swaps?
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