An accrual swap in which interest starts accruing on the fixed leg when the floating reference rate enters into (or becomes in) a certain range (corridor). Though it must be pre-determined, the width of the range may not necessarily be fixed once and for all. That is, it may reset at the beginning of each payment period, increasing or decreasing in tandem with reference spot or forward prices or rates. The corridor accrual swap is used by investors who expect rates to remain stable into a corridor and here they prefer to receive the fixed leg, or, on the contrary, who anticipate that a high volatility would affect rates and as such they prefer to pay the fixed leg.

For example, assuming today (January 9, 2008) a corridor accrual swap that initiates on February 17, 2008 and expires on February 17, 2012, and that the floating rate used on the floating leg is the 6-month LIBOR. The notional principal is 15,000,000 USD, and the range is [4%-5.5%]. Therefore, interest accrues on the fixed leg only on days when the 6-month LIBOR is in the range. Company (A) wants to enter into a corridor accrual swap to pay the fixed rate and receive the floating rate. Every six months, the company would pay on the fixed leg:

Payment on fixed leg= 1/2 X $15,000,000 X fixed rate X n/N

where “n” is the number of days in the life of the swap when the floating rate is in the specified range [4%- 5.5%] and “N” is the number of days in the life of the swap.

The corridor accrual swap is also referred to as a range accrual swap.