SWAP Spread

[dahcrap]

Guys,
How do you arrive at the formula
Swap spread = Reference Rate - Treasury Rate. I couldnt make sense out of the CFAI text explanation

 

[green360]

the swap spread is the risk premium associated with an investment. The gov’t rate (Treasury rate) is considered risk-free, so the spread above the treasury rate is your compensation for taking on additional investment specific risk.

 

[Hello Mister Walrus]

Reference rate = the rate for an “unsafe” investment (like a corporate bond)
Treasury rate = risk free rate
Reference rate = Treasury Rate + spread
It’s really simple. You need to be paid a higher rate if the holder of your money is less safe. That is why there is a positive spread over treasuries. Don’t be confused because it’s a “swap” spread. The swap market is just a market where you can observe spreads. The spreads can be applied to other investments.

 

[dahcrap]

Thanks HMW. That clears it up