Swap rate
The fixed rate on an interest rate swap that makes it worth zero at the start. It is the par yield implied by the swap's discount factors, and the curve of these rates is a market benchmark.
Where you will meet it
Swap rate appears in 10 learning outcomes on the CFA syllabus. A few of them:
- Explain the I-spread and curves built from swap rates
“The swap rate curve is the term structure of fixed rates on interest rate swaps, and it serves as a benchmark in markets where the government curve is distorted by scarcity, regulation or central bank purchases.”
- Tell apart what a swap is worth and what it is priced at
“The price is the fixed rate, the swap rate, agreed at initiation.”
- Explain what the swap rate curve is, and the reasons and ways that market participants rely on it when valuing instruments
“The swap rate curve plots the fixed rates at which dealers swap fixed payments for a floating reference rate across maturities.”
- Explain the pricing of interest rate swaps, and work out their no-arbitrage value and say what it means
“A swap's fixed leg is priced like a par bond: the swap rate is (1 − final discount factor) ÷ sum of discount factors for the payment dates.”
See also
Discount factor · Interest rate swap
Practise it
Practise swap rate until it is automatic: questions that explain every wrong option.
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