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How to calculate an Asset Swap Spread with a ZC Bond?
Posted: August 13th, 2009, 11:00 am
by CQuant
Hi,does anybody know, how to calculate an Asset Swap Spread related to an Zero Coupon Bond? It seems to be a little bit fancy..regards
How to calculate an Asset Swap Spread with a ZC Bond?
Posted: August 13th, 2009, 12:22 pm
by cigor
just a thought, not sure if this is actually done:Get the price of the risk-free zero coupon bond with same maturity and same face value.The difference between this and price of the risky bond should match PV of IRS and that gives you the ASW.
How to calculate an Asset Swap Spread with a ZC Bond?
Posted: August 14th, 2009, 11:57 am
by Blazes
Generally an asset swap calculation will involve discounting all the flows from the bond (including purchase price) and expressing this value as a spread over LIBOR on a principal equal to par value of the bond. With ZC procedure is the same but given the par/par nature of asset swaps it means that an investor will receive the "yield" only on the discounted amount the balance will attract interest at the swap books funding rate (range of LIBOR to OIS). If there is collateral arrangement this becomes a little circular as upfront payment on swap comes back under CSA so ture return will be a function of the original bond, the funding rate built into the ASW calculation and the rate on the collateral! So can be a bit fancy!