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Index Amortizing Swap
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An interest rate swap agreement with a notional principal amount that declines as a function of a short-term money rate such as LIBOR. The use of an index protects the fixed rate receiver from unanticipated or erratic prepayment risk. A flaw in the structure is that actual prepayment risk to the fixed rate payer-who often holds mortgage securities-is usually greatest and least stable when the reference index rate is lowest. Compare with Indexed Principal Swap (IPS). Also called Amortizing Interest Rate Swap. See Amortizing Swap.
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