Bond Pricing Relative to Swap Curve

This question is set in a fixed income context where a bond from a specific issuer is originally quoted at par using the issuer's own yield curve. The variation is to imagine repricing that same bond off the swap curve instead, and to reason about how the quoted price would move. Candidates are asked to connect the idea of issuer-specific credit risk to the choice of discount curve, and to interpret what happens when you move from a credity issuer curve to a more "benchmark" curve such as the swap curve. Variants of this style of question are common in sell-side fixed income and rates trading or structuring interviews.

To answer well, you need a solid grasp of present value, discount factors, and the relationship between yields, risk premia, and bond prices. It leans on understanding term structures, credit spreads, and how different curves are constructed and used in practice. Interviewers watch for whether you can reason consistently about discount rates and prices without doing any complicated math, articulate the economic meaning of curve choice, and avoid naive assumptions like "par stays par regardless of curve."

What it tests

Bond pricing fundamentally depends on the discount rate used to value future cash flows: the lower the discount rate, the higher the present value of those cash flows. In credit markets, different curves (such as the issuer's own yield curve versus the swap curve) embed different risk premia reflecting the likelihood of default or other credit events. The swap curve typically represents a lower-risk benchmark, often close to risk-free rates, because swaps do not involve principal exchange and are thus less exposed to credit risk. When a bond's cash flows are discounted at a rate that does not fully reflect its credit risk (i.e., a lower, less risky curve), the resulting price will be higher than if a riskier, issuer-specific curve is used. This principle holds because the market demands compensation for risk, and the discount rate is the mathematical expression of that compensation.