Let's say I have a 3mv6m tenor basis swap that is quoted at a spread of x bp (and it is a spread on the 3m leg while the 6m leg is the flat leg). Nowadays, I think the convention in most currencies is to compound the 3m rate so that there is a single payment only at the 6m schedule. For this case I have 2 questions related to the spread and handling of the compounding:

1) is the spread of x bp quoted as a 3m compounded spread (like it was before when there was no compounding) or a 6m compounded spread (to be directly added to a 3m rate compounded to 6m)?

2) assuming the x bp spread is a normal 3m spread: is the implied 3m cashflow (incl. spread cashflow) compounded with the 3m rate flat (i.e. no compounding with spread included)?

Anybody trading tenor basis swaps here?

TIA for any feedback.


This would be specified in the ISDA or term sheet. There are four alternative methods:

No compounding: Meaning neither the rate nor the spread get compounded.

Compounding: Meaning both the spread and the libor rate get compounded.

Spread exclusive compounding:Meaning the libor get compounded but the spread does not. This was not covered by ISDA 2006 but was quite widespread.

Flat compounding: Slightly more involved, but in your example of 3mV6m, would mean that the first 3m of the quarterly leg gets compounded at the interest rate (excluding spread) but then the amount of first sub period would include spread. So you can see it’s half way between the two extremes.

The calculations are detailed in the below excel file:



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