I’m confused regarding the definition of Swap Spread and the subsequent example given in the CFA II book:
Defintion: …spread over the on the run government security
Example: swap rate for 2.97 years = 0.586%. If the swap spread for the same maturity is 0.918%, then the YTM on the bond is 1.504%.
How can this be?
swap rate = fixed rate on the swap = 0.586%
swap spread = spread over the on the run government security = YTM on Govt bond - fixed rate
so YTM On Govt bond = 0.918 (spread) + 0.586 = 1.504%
Are you sure you picked the info up correctly? YTM of gov T-bond must be lower than the swap rate of the same maturity. Can you specify the Book, chapter and page where this example appears?
YTM on government bond + swap spread = swap fixed rate
Something’s wonky with your numbers: swap fixed rate > YTM on government bond
I think your swap spread value is negative. Then only can the govt bond ytm be 1.504%.