Finance | M
The reference rate which is used to calculate the premium that a bond buyer will pay. Adding a spread to a reference rate is one method to value a bond (or a Sukuk issue, as in Islamic finance). The spread can be calculated with respect to a benchmark, prominently the government bond rate, or the swap rate of an identical maturity. The bond price, according to this method, can be a specific number of basis points (bps) over the mid-swap. The mid-swap is the average of bid and ask swap rates. As such, the bond price is made up of x basis points in addition to the interest rate offered by the swap market. Swap markets present an important source for medium and long-term interest rates. For example, a Sukuk issue of USD 500 million, maturing in five years, can be priced at 287 basis points over mid-swaps.
Generally speaking, mid-swap is the price calculated as the midpoint between the bid and offer prices (buy and sell prices) on currency or interest rate transactions (swaps).