Par-Par vs Proceeds Asset Swap Packages

An asset swap packages a fixed-rate bond together with an interest-rate swap so that an investor ends up holding a floating-rate exposure to the bond's credit risk, receiving a floating rate (like SOFR plus a spread) instead of the bond's fixed coupon. There are two standard ways to build the package, and they differ mainly in how they treat a bond that isn't trading exactly at par.

In a par-par structure, the investor pays par (100) for the bond even if its market price is, say, 92 or 108, and the swap's notional is fixed at par regardless — the price difference between par and the actual market price is embedded into the swap cash flows via an upfront payment, keeping the mechanics clean but requiring an adjustment for that upfront gap. In a proceeds structure, the investor pays the bond's actual market price, and the swap notional matches that real proceeds amount — simpler in one sense, but it means the fixed-to-floating spread calculation is now sensitive to exactly what price was paid.

Worked example. A bond trades at a discount, price 90, with a 5% coupon. Under par-par, the investor pays 100 (par) for the bond and the swap notional is 100; a supplemental upfront payment reflects the 10-point discount actually paid versus the par assumption. Under proceeds, the investor pays 90 and the swap notional is set at 90, so the floating spread calculated off that swap is different from the par-par version because it's being computed on a smaller notional base. The two structures should be economically equivalent in principle, but market convention and documentation typically default to par-par for standard bonds because it produces a cleaner, more comparable asset-swap spread across different bonds trading at different prices.