coupon swaps - mechanics

Is there anyone here familiar with coupon swaps and how they work. We are swappin fixed for floating rate coupons. We’ve got a portfolio of high grade bonds that float on Libor…but now we are going to start buying longer fixed bonds (more yield) and swap those for floating. What I’m wondering is how is the deal set up at initiation with the counterparty. We will have a bucket of fixed bonds of various sector/coupon/maturity and the counterparty will have totally different bond characteristics. How is the deal set up so that it has no value at initiation…I think I may have an idea but I need to get my brain around it and it’s not in the L2 books. Thanks guys!

You mean how do you do an interest rate swap? You call up your prime broker and they send you to the swaps desk who checks your credit and then asks what you want to do and then you’re done.

Exactly why make it hard! But my accounting area is asking me all these darn questions! I think they are trying to understand how they will do effectiveness testing. The questions seem to revolve around how the two portfolios of different fixed income assets (ours and counterparty) are matched at initiation with a zero value. Not being a derivatives guy nor having ever done a bond coupon swap I don’t know the mechanics but it would be interesting to learn more. Is it just the same as a fixed for floating IR swap because that I get.

effectiveness testing: Your prime broker might do it as a freebie in exchange for the business. Your auditor will be checking the results; they could give you references on how to do it. And of course googling “effectiveness testing” will yield, 33,800 hits.

Even though I got out of investment accounting years ago people keep coming to me with stuff like effectiveness testing. You can run but you can’t hide I guess. Anyhow they are going to do this painful testing themselves as opposed to having GS do it. While I don’t need to actually do anything I’d still like to be more knowledgeable about coupon swaps if anyone has wisdom to share.