I'm struggling to understand the concept of a constant maturity swap - can anyone explain this please? In particular I have no idea what is meant by... "A swap where the floating leg of the swap is for a longer maturity than the frequency of payments"
swap Hi The way it works is that you might pay a fixed 3% for 10 years, and receive a floating rate which, instead of setting each 6 months to LIBOR, it would set each 6 months to the "20 year government bond rate". So you pay fixed and receive a constant maturity interest rate. Dont know if that helps. Its a wierd type of swap I think.
A constant maturity swap is an interest rate swap, it's just that the floating rate is based on a longer maturity than the time period between payments. For example, you could see: "Vanilla" interest rate swap - swap 5% fixed, for the 6 month LIBOR rate, twice a year. "Constant Maturity" swap - swap 5% fixed, for the 5 year LIBOR rate, twice a year.
