{"id":17133,"date":"2021-07-07T23:05:51","date_gmt":"2021-07-07T23:05:51","guid":{"rendered":"https:\/\/analystprep.com\/study-notes\/?p=17133"},"modified":"2026-03-11T16:18:52","modified_gmt":"2026-03-11T16:18:52","slug":"calculate-and-interpret-the-swap-spread-for-a-given-maturity","status":"publish","type":"post","link":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/calculate-and-interpret-the-swap-spread-for-a-given-maturity\/","title":{"rendered":"Swap Spread"},"content":{"rendered":"<script type=\"application\/ld+json\">\r\n{\r\n  \"@context\": \"https:\/\/schema.org\",\r\n  \"@type\": \"QAPage\",\r\n  \"mainEntity\": {\r\n    \"@type\": \"Question\",\r\n    \"name\": \"How do you calculate the swap spread between a LIBOR swap rate and a Treasury yield?\",\r\n    \"text\": \"The four-year fixed-for-floating LIBOR swap rate is 4.62%, and the yield on the four-year US Treasury bond is 4.41%. The swap spread is closest to:\\n\\nA. 0.105%\\nB. 0.210%\\nC. 4.515%\",\r\n    \"answerCount\": 1,\r\n    \"acceptedAnswer\": {\r\n      \"@type\": \"Answer\",\r\n      \"text\": \"The correct answer is B. The swap spread equals the swap rate minus the government bond yield. Swap spread = 4.62% \u2212 4.41% = 0.21%, or 21 basis points.\"\r\n    }\r\n  }\r\n}\r\n<\/script>\r\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/ovQh3D6WBOw\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\r\n\r\n<p>The <em><strong>swap spread<\/strong><\/em> is obtained by taking the difference between a swap\u2019s fixed leg rate and the yield on a recently issued government bond (\u201con the run issue\u201d) with the same maturity. Swap spreads can be used to value bonds.<\/p>\r\n<p>The fixed interest rate payer pays the swap spread. Swap spreads across maturities can be used to measure the creditworthiness of major banks that provide swaps.<\/p>\r\n<h4>Example: Swap Spreads<\/h4>\r\n<p>Assume that the fixed leg rate of a six-year fixed-for-float Libor swap is 5.00% and the six-year US Treasury bond yield is 4.60%. The swap spread will be 5.00% \u2013 4.60% = 0.40%.<\/p>\r\n<p>Investors use the swap spread to identify the <em><strong>time value<\/strong><\/em>, <em><strong>credit<\/strong><\/em>, and <em><strong>liquidity<\/strong> <\/em>components of a bond\u2019s yield to maturity. They will require higher compensation for credit and liquidity risks when the swap spread is high.<\/p>\r\n<p>The swap spread can be used to indicate the liquidity of a default-free bond and can also provide evidence of market mispricing.<\/p>\r\n<blockquote>\r\n<h2>Question<\/h2>\r\n<p>The four-year fixed-for-floating LIBOR swap rate is 4.62%, and the yield on the four-year US Treasury bond is 4.41%. The swap spread is <em>closest to<\/em>:<\/p>\r\n<ol type=\"A\">\r\n\t<li>0.105%.<\/li>\r\n\t<li>0.210%.<\/li>\r\n\t<li>4.515%.<\/li>\r\n<\/ol>\r\n<p><strong>Solution<\/strong><\/p>\r\n<p><strong>The correct answer is B.<\/strong><\/p>\r\n<p><span style=\"font-size: 1.1em;\">$$ \\begin{align*} \\text{Swap spread} &amp; = \\text{Swap rate}\\ &#8211; \\text{Government bond yield } \\\\ &amp;=4.62\\%\\ \u2013 4.41\\% = 0.21\\% \\text{ or } 21 \\text{ bps} \\end{align*} $$<\/span><\/p>\r\n<\/blockquote>\r\n<p>Reading 28: The Term Structure and Interest Rate Dynamics<\/p>\r\n<p><em>LOS 28(f) Calculate and interpret the swap spread for a given maturity.<\/em><\/p>\r\n\n            <div \n                class=\"elfsight-widget-pricing-table elfsight-widget\" \n                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Swap spreads can be used to value bonds&#8230;.<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[102,472],"tags":[216,548,547,556],"class_list":["post-17133","post","type-post","status-publish","format-standard","hentry","category-cfa-level-2","category-fixed-income","tag-cfa-level-2","tag-fixed-income","tag-reading-32","tag-swap-spread","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Swap Spread - CFA, FRM, and Actuarial Exams Study Notes<\/title>\n<meta name=\"description\" content=\"Learn about swap spreads, their calculation, and interpretation in bond valuation and creditworthiness assessment.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/calculate-and-interpret-the-swap-spread-for-a-given-maturity\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Swap Spread - 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