Interest rate swaps play a pivotal role in the financial markets worldwide. So let's turn our focus to these instruments, particularly the single currency fixed to floating interest rate swap. These swaps involve two concurrent series of cash flows known as swap legs each in the same currency. One leg has a fixed interest rate. Its payments clearly defined from the onset of the trade. The other leg is characterized by a variable of floating interest rate tied to a benchmark known as the reference rate. Consequently, the payments for the floating leg remain uncertain when the swap is initially traded and are dependent on the future fluctuations of the reference rate. Within these transactions, we identify the parties either as the payer or the receiver based on who commits to the fixed rate. The receiver is entitled to receive the fixed interest rate payments while reciprocating with the floating rate payments. And conversely, the payer makes the fixed rate payments in return for variable ones. Now, let's dissect some of the integral interest rate swap terminology through an illustrative example.

Consider a trader who enters into a swap agreement with a notional value of $100 million, a tenor of 10 years, and a fixed swap rate of 3.86% against SOFR. How do we interpret this information? Well, the $100 million symbolizes the notional amount. It's the bedrock upon which we calculate the interest for both legs, yet it doesn't physically change hands between the parties.

When we refer to a 10 year tenor, we're discussing the duration of the swap agreement, the time loan over which these interest payments will be regularly exchanged. The swap rate fixed at 3.86% is the rate the payer will provide annually in exchange for the floating payments. This fixed rate remains constant providing a predictable cash flow once every year. The SOFR or overnight secured financing rate is the reference rate succeeding LIBOR as the predominant US money market benchmark rate. It's this rate that will determine the floating legs payments regarding the reset frequency SOFR operates on a daily adjustment schedule, meaning that the floating rate will recalibrate each business day to reflect the latest software. In contrast, the fixed swap rate remains unchanged throughout the life of the swap. It should be noted that although the variable rate is reset daily in this kind of agreement, the floating leg payments are usually made in less frequent intervals. For example, semi-annually or annually.