Interest rate swaps are popular over-the-counter (OTC) 澳洲幸运5官方开奖结果体彩网:financial instruments that allow an exchange of fixed payments for floating payments—often linked to London Interbank Offered Rate (LIBOR). Businesses across the globe get into interest rate swaps to mitigate the risks of fluctuations of varying interest rates, or to benefit fromﷺ lower interest rates. We explain how to read interest rate swap quotes.

Sourcing Your Information

Multiple websites offer quoܫtes for interest rate swaps. Below is a sample quote for a 10-꧋year interest rate swap:

Another example below:

Reading the Information

The details presented in the quote contain the standard open, high, low, and close values based on daily trading💃. Note that the unit for interest rate swap quotes is percentages, which indicates the annualized interest rate. Hence, a value of 1.96 actua𒁏lly means annual interest rate of 1.96%. While applying this on quarterly or semi-annual basis, this rate needs to be down-scaled to fit the duration.

Any values indicating 澳洲幸运5官方开奖结果体彩网:percentage change figures (like %Change from Previous Close or %Change from 52 week high/low) need to be looked at carefully. For example, in the y-chart quote, the last fiꦆeld “Change from Previous” shows -1.51%. This is a percentage change = (last value/previous value -1)*100% = (1.96/1.99-1)*100% = -1.51%. This is not a simple subtraction. Since we are comparing percentage values, the reported percentage change is actually percentage o🐼f percentage.

Depending on the details covered by individual data providers, there can be additional fields like 澳洲幸运5官方开奖结果体彩网:standard deviation and 100-day average of quoted values. 

The most important fields, which an interested market participant looks for in a price quote, are the bid and ask values. These are the values on which the trading or transaction takes♛ place. 

U𓄧nderstanding the Price Quotes for Interest Rate Swaps

To understand the price quotes for interest rate swaps, let’s assume a company CFO is in need of $500 million in capital for a 10-year term. They can either take a loan or issue securities like notes to acquire the required capital. Th❀ey prefer a fixed-rate loan to guard against any intermittent increase in floating interest ratꦍes, but currently has the option of issuing only floating rate notes.

They decide to issue a 澳洲幸运5官方开奖结果体彩网:floating interest rate note LIBOR plus 100 basis points, and enter into a pay fixed/receive floating interest rate swap contract to secure protection from varying interest rates.✨

They contact a swap dealer who quotes the fꦬollowing for interest rate swaꩵps:

Assume that the above rates are s⛦emi-annual rates, on actual/365 b🌊asis versus six-month LIBOR rates (as termed by the dealer).

1. Any end-user (like the CFO) who wishes to pay fixed (and hence receive floating rate) will make semi-annual payments to the dealer based on a 2.20% 澳洲幸运5官方开奖结果体彩网:annualized rate (ask rate) on the actual/365-day convention.
2. Any end-user who wishes to pay floating (and hence receive fixed rate) will receive payments from the dealer based on the 2.05% annualized rate (bid rate)
3. The dealer has a (2.20 - 2.05 = 0.15% = 15 basis point) spread, which is their commission.

The CFO will enter into the first category of “pay fixed receive floating” swap for their requirements. They will receive the LIBOR rate from the dealer and pay 2.2% to the dealer on the notional amount of $500 million. The issued floating rate note will pay LIBOR+1% to the note holders. Effective net payable = +LIBOR - 2.2% - (LIBOR +1%) = -3.2% (negative indicates payable).

Alternatively, interest rate swap quotes may also be available in terms of a 澳洲幸运5官方开奖结果体彩网:swap spread. However, it should be noted that the swap spread in an interest rate swap quote is NOT the 澳洲幸运5官方开奖结果体彩网:bid-ask spread of the swap quoted values. It is the differential amount that should be added to the y🌳ield of a risk-free Treasury instrument that has a similar tenure. For example, assume 10-year T-Bill offers a 4.6% yield. The last quote of a 10-year interest rate swap having a swap spread of ๊0.2% will actually mean 4.6% + 0.2% = 4.8%.

The Bottom Line

Interest rate swap quotes vཧary from standard price quotes of commonly traded instruments. They can appear puzzling because the quotes are effectively interest rates, quotes may be provided as swap spreads, and the quotes may follow local OTC market conventions. Market participants should take due care in understanding the quotes before entering into swap contracts.