Asset-Swap Packages and Floating-Rate Bonds Under Different Credit Curves

Summary

The document raises a valuation question about switching from a fixed-rate bond combined with a swap into a floating-rate bond issued by the same borrower with matching notional and maturity. Although both positions appear to provide floating cash flows over the same period, the writer reports that comparing sale losses and future income produces a substantial difference. A toy spreadsheet model suggests one possible explanation: the bond issuer and swap counterparty are discounted using different rates because their credit quality differs.

No answer or formal valuation is included, so the proposed explanation remains a hypothesis rather than a demonstrated result. The discussion highlights that similar contractual cash flows need not imply equal value when the instruments expose the holder to different credit risks or discounting conventions. It does not provide the terms of the swap, collateral assumptions, recovery treatment, funding costs, or a quantitative breakdown of the observed difference. Those details would be needed to assess the comparison and distinguish credit, pricing, and transaction effects.

Key ideas

• A fixed bond combined with a swap can appear to replicate a floating-rate bond from the same issuer.
• The document reports that the positions can show different switching economics despite similar floating cash flows.
• Different discount rates for issuer and swap-counterparty exposures are proposed as an explanation.
• The discussion supplies no derivation or final answer, so the proposed cause is not established.
• A full comparison would need the instrument terms and relevant credit and collateral assumptions.

Tags

# 53966


# Is the value of an Asset-Swap (Underlying + Swap) the same value as a floating-rate bond with the same issuer, maturity, etc.?












I am trying to evaluate the impact of switching an Asset-Swap Package (fixed bond + Swap) into a floating rate bond of the same issuer with the same notional and maturity. My intuition would tell me that both instruments should be equivalent, as with both I am receiving a floating cash flow from the same issuer for the same time frame.

However, when I check my loss from selling the underlying and the swap and add this loss to the income I would get from the new floating rate bond and compare it to the total income I would get if I didn't switch, I see a substantial difference.

I also created a model in Excel with toy numbers to check that and I saw that if I use a different discount rate for the bond issuer and the Swap (as the former has a lower credit quality than the Swap counterparty) the two are not similar.

Do you have any insight into this topic?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.