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I am trying to evaluate the impact of switching an Asset-Swap Package (fixed bond + Swap) into a floating rate bond of the same issuer with the same notional and maturity. My intuition would tell me that both instruments should be equivalent, as with both I am receiving a floating cash flow from the same issuer for the same time frame.

However, when I check my loss from selling the underlying and the swap and add this loss to the income I would get from the new floating rate bond and compare it to the total income I would get if I didn't switch, I see a substantial difference.

I also created a model in Excel with toy numbers to check that and I saw that if I use a different discount rate for the bond issuer and the Swap (as the former has a lower credit quality than the Swap counterparty) the two are not similar.

Do you have any insight into this topic?

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    $\begingroup$ intuitively, you are correct. the bond cash flows need to be discounted at a risky discount rate. If the swap is collateralized or cleared, the discount rate is the risk free rate. if it is not, then the discount is the risky discount rate of the counterparty. $\endgroup$ – dm63 May 8 '20 at 11:05
  • $\begingroup$ @dm63 thanks, so you would say that the value of the asset swap package need not be equal to the value of a floating rate note with otherwise similar characteristics? $\endgroup$ – tobbog May 8 '20 at 14:26
  • $\begingroup$ Yes indeed it could be different , especially with a lowly rated bond issuer $\endgroup$ – dm63 May 8 '20 at 22:50

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