What is a Swap Spread?
How Does a Swap Spread Work?
Companies engage in swaps in order to benefit from an exchange of comparative interest rate advantage. The terms of a plain vanilla (i.e. straightforward) swap are highly variable from contract to contract based on the needs of and resources available to the participating counterparties. A Treasury bond is often used as a benchmark because its rate is considered risk-free. The swap spread on a given contract indicates the associated level of risk. Risk increases as the spread widens. For instance, if one 10-year swap, XYZ, has a fixed rate of seven percent and a 10-year Treasury bond with the same maturity date has a fixed rate of five percent, the swap spread would be two percent (200 basis points) (7% - 5% = 2%).
Why Does a Swap Spread Matter?
As a reflection of risk, swap spreads are often used to assess the creditworthiness of participating parties.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.