Asset swap
An asset swap is a composite financial instrument that is sold by banks in interbank trading and to institutional investors.
It consists of two parts: an exchange transaction ( swap ) and a bond , which usually has a fixed interest rate (coupon). The constant interest side of the swap matches the interest payments of the bond in terms of nominal value, nominal interest (also called coupon) and payment date. A typical case of an asset swap is a fixed rate bond that is sold along with a payer swap with the same coupon. In this case, the buyer of an asset swap receives the fixed interest rate from the bond issuer and immediately passes this on to the swap partner, from whom he receives the variable interest rate (often the three-month Euribor in Europe ) plus a premium (English spread ) receives. On balance, the buyer is buying a synthetic floater , a floating-rate bond.
The package of bond and swap bears the credit risk of the bond (i.e. failure of the issuer), but has only a low interest rate risk, since the interest rate received from the swap is variable. And that is also the reason why these packages are formed: Often, investors only want to buy a credit risk (paid for by the spread), but not the interest rate risk. On the other hand, companies very often issue bonds with fixed interest rates and a correspondingly high interest rate risk. Asset swaps are often traded in the form of par-par structures. For a bond that is quoted on the market at 95, for example, the buyer still pays par, i.e. 100. For the overpaid 5, an additional interest is determined, the present value of which is just 5, it is added to the spread (similar an agio ). The other variant of Par-Par is Yield-Yield, where both bonds and swaps are not traded at 100 (Par), but at current market conditions.