How Pricing and Discount Curves Differ in Interest Rate Swaps

Summary

The document asks why an interest rate swap may use separate curves for projecting floating coupons and discounting future cash flows. It identifies the pricing curve with the curve used to infer rates for floating-leg accruals, then asks whether a different curve should determine the present value of the swap.

This is a focused conceptual question about multi-curve swap valuation. The text supplies no answer, market convention, numerical illustration, or discussion of collateral and funding assumptions, so it does not establish when particular curves apply. Its useful point is the distinction between generating expected cash flows and discounting those cash flows to current value. Any practical valuation would need to specify the relevant index, collateral agreement, and market framework.

Key ideas

• A swap valuation can use one curve to project floating-leg coupon rates and another to discount future cash flows.
• The projection curve estimates rates relevant to the floating index over coupon periods.
• The discount curve is used to convert future swap cash flows into present value.
• The document poses the distinction but does not explain market conventions or provide a valuation example.

Tags

# IRS: Diff between "pricing curve" and "discounting curve"


# IRS: Diff between "pricing curve" and "discounting curve"












I'm reading a book on swaps and author mentions in the typical attributes of swaps:

"Discount curve: For present-value calculations (say, to calculate the current market value of the swap), what interest rates will we choose? And because interest rates vary by term, and a yield curve conveys a whole set of rates at once, what yield curve shall we reference for this swap? Note that the discount curve need not be the same as the pricing curve."

What does he refer to when differenciating "pricing" and "discount" curves?

My understanding is that for the floating leg, we just source a yield of a yield curve for the calculation of accruals on coupon dates (aka "pricing" curve).

But then I get lost, would we use another yield curve for discounting (for present swap market value)? Any clarification would be helpful!

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