What is an Asset Swap?
As a means of helping the cash flow of a company function more efficiently in relation to the current liabilities held by the organization, the asset swap is a great way of utilizing interest rates to best advantage. The asset swap involves creating a package that includes some sort of cash credit medium or asset and a swap of assets equal in value to create a floating interest rate instrument. More simply, in an exchange of assets, a fixed asset is manipulated to become a floating asset. Sometimes referred to as an asset exchange, the asset swap is particularly useful with interest bearing bonds. Using the asset swap method to exchange two different types of bonds can create what is referred to as a gross spread. This gross spread is arrived at by calculating the values of the cash flow from the bond, assuming zero rates are applied to the bond. With the number amount of the gross spread applied to the value of the bond that is being used in the swap or exchange, this creates a situat
Asset swaps normally involve an investor buying a fixed coupon bond and at the same time entering into an interest rate swap that has a maturity equal to that of the bond. The investor uses the coupon received from the bond to pay fixed interest on the swap. The swap counterparty then pays a floating rate of interest to the investor.
