Asset Swap

An asset swap is a derivative structure in which an investor exchanges the cash flows of a fixed-rate bond they hold for a floating-rate cash flow stream from a swap counterparty — effectively converting the economic exposure of a fixed-rate bond into a floating-rate instrument while retaining the bond's credit risk. The investor continues to hold the bond and receive its fixed coupon, but simultaneously enters into an interest rate swap where they pay the fixed coupon to the swap counterparty and receive a floating rate (typically LIBOR, SOFR, or MIBOR in India) plus or minus a spread. Asset swaps are used by institutional investors who want to eliminate interest rate risk from a bond position while retaining the credit spread as compensation for the issuer's credit risk. The asset swap spread — the floating rate the investor receives over the benchmark — is a widely used measure of a bond's credit risk premium. In India, asset swaps on government securities and high-grade corporate bonds are executed between banks, primary dealers, and institutional investors in the OTC market — allowing participants to efficiently convert fixed-rate bond exposure into floating-rate income streams aligned with their liability profiles.