hard · Debt Capital Markets primary-issuance-syndication
An issuer runs a dual-tranche EUR transaction: a 5-year fixed and a 5-year FRN, both senior unsecured, same seniority. The fixed tranche prints at MS+80; the asset-swap (ASW) spread of the fixed tranche at reoffer is MS+86. The FRN prints at E+82 (DM = discount margin). The syndicate wants the two tranches to be 'arbitrage-neutral' so neither cannibalizes the other.
Ignoring tiny basis effects, which condition best indicates the two tranches were priced consistently against each other?
- The FRN's discount margin should equal the fixed tranche's reoffer spread to mid-swaps (E+82 vs MS+80), since both reference the same swap curve at the same maturity.
- The FRN's discount margin should equal the fixed tranche's asset-swap spread (E+82 vs MS+86), because the ASW spread is the floating-rate equivalent of the fixed bond and is the like-for-like comparison to a FRN's DM.
- Arbitrage-neutrality requires the FRN coupon (E + margin) to equal the fixed coupon, so the 4bp gap between E+82 and MS+86 reflects a pricing error in the fixed leg.
- Consistency requires the fixed reoffer spread to exceed the FRN DM by exactly the swap spread, so MS+80 vs E+82 with a 2bp gap is the neutral relationship.
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