A range accrual swap in which the observation rate is based on a constant maturity swap (CMS) rate, rather than a reference index such as LIBOR. More specifically, it is similar to an ordinary interest rate swap, where the interest rate paid by the first leg is either a fixed or floating interest rate. However, the key difference is in how the coupon of the second leg is referenced. In a CMS range accrual swap, the fixed or floating coupon is conditional on the the number of days the CMS rate spends within a predefined range (constructed using an upper and lower barrier). The CMS rate is usually observed on a daily, weekly or monthly basis within the coupon period. As such, for each fixing date that the CMS rate fixes remains within the predefined range, one day of interest at the coupon rate is accrued. In contrast, every day the CMS rate breaks through the predefined range, in either way, then whole value of the coupon is paid out.

The interest rate paid by the CMS leg on each payment date is calculated as follows:

n/N * interest rate * notional principal amount

where: “n” is the number of resetting days in the payment period that the CMS rate sticks to the specified range; “N” is the total number of resetting days in the payment period.