Swap Spread Definitions Assume a Flat Floating Leg

Summary

The question distinguishes a market quotation for a swap spread from the customized fixed rate a company might negotiate when swapping its own borrowing costs. It asks whether a borrower’s credit margin over the floating benchmark changes the swap spread because it affects the fixed rate received or paid in a particular transaction.

The answer clarifies that the conventional swap spread is defined using a swap whose floating leg is at the benchmark rate, such as LIBOR flat, and compares its fixed rate with a government bond yield of similar maturity. A borrower’s separate credit margin is not included in that benchmark swap definition. The response is concise and does not discuss collateral, discounting conventions, benchmark transitions, or other market-specific details that can affect how swap spreads are measured.

Key ideas

• A conventional swap spread compares a benchmark swap’s fixed rate with a similar-maturity government bond yield.
• For the definition, the floating leg is assumed to pay the benchmark rate without an added borrower margin.
• A company’s credit spread on its borrowing is separate from the standard swap spread quotation.
• Market conventions and valuation details are outside the brief explanation.

Tags

# Basic question about swap/swap spreads


# Basic question about swap/swap spreads












When I read up on swap spreads, the definition always goes something like this: The swap spread is the difference between the fixed leg of swap and a Treasury bond with the same maturity.

So if the fixed leg of a 10y swap is 8% and the Treasury bond has a rate of 5%, the spread is 3%. What confuses me about this is that I thought the fixed rate of the swap depends on the floating leg: If a company has a variable interest rate of Libor + 2%, they will probably get a different fixed rate in a swap compared to a company with Libor + 1%. And that would lead to a different swap spread.

Could someone point out where my mistake is?

## Answer by dm63 (score 3, accepted)

https://quant.stackexchange.com/a/45910

Yes that’s pretty simple : for the purposes of defining the swap spread, we assume that the libor leg of the swap is at libor flat.

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