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In a 5 year Libor Swap, say fixed vs. 3 months Libor, what is the credit risk reflected by the fixed leg ? (I'm ignoring counterparty credit risk). Would the fixed leg reflect 3 month Libor quoting bank credit quality ?

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LIBOR is the London Interbank Offered Rate. These are the rates that banks are offering to lend to each other and therefore will reflect the average credit quality of the banks that participate in the establishing the setting of the rate, which is generally about a AA credit rating.

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  • $\begingroup$ Sure, but would the 5 year swap rate reflect the 3 month credit risk of the average bank that contributes to Libor, or would it be the 5 year credit risk ? $\endgroup$ – Beltrame Mar 27 '18 at 13:38
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    $\begingroup$ The panel of contributing banks is (re) selected every year, so the panel would presumably stay of AA rating over time unless all banks get downrated. $\endgroup$ – Antoine Conze Mar 27 '18 at 14:27
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    $\begingroup$ So the 5 year swap rate reflects the average over 5 years of prospective panel banks 3 months credit risk, not the 5 year credit risk. In other words the credit risk of rolling a 3 months loan to a bank that is always AA, not the credit risk of lending for a period of 5 years to a bank that is initially AA. $\endgroup$ – Antoine Conze Mar 27 '18 at 14:35

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