Summary. Floating rate bonds are bonds that pay a variable coupon, depending on the prevalent market conditions at future points in time. The interest rate sensitivity of such a bond is very limited. But this comes a cost, since we are uncertain about the size of the future coupon payments. For example, a floating-rate bond might annually pay LIBOR plus 1 percent in semiannual payments. If the annualized LIBOR rate is 2.5 percent, the new bond annual rate is 3.5 percent. On a $1,000 face value, this equals a seminannual payment of $1,000 times 0.5 year times 3.5 percent per year, or $17.50. The swap contract in which one party pays cash flows at the fixed rate and receives cash flows at the floating rate is the most widely used interest rate swap and is called the plain-vanilla swap or just vanilla swap. You can think of an interest rate swap as a series of forward contracts.