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constant maturity swap

B

BeckyBoo

Member
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.
 
How is this different to an interest rate swap?

Thanks!
 
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.
 
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