A popular application of interest rate swaps is in new issue swaps. Which are commonly used by borrowers who have issued fixed rate bonds, but they prefer to pay a floating rate. To illustrate, many new issue swaps involve large supranationals such as the European Investment Bank, EIB, or the World Bank. These entities often hold floating rate assets such as loans to clients, and the bank will receive floating rate payments from those clients. Which means the bank would prefer to have floating rate liabilities that move in tandem with their floating rate assets. Consequently, new issue swaps enable these organizations to align their new liabilities with their old floating rate assets, providing flexibility and effective risk management. In this scenario, let's say a borrower has issued a fixed rate bond paying a coupon rate of 4.5%, but they want to manage interest rate risk by paying floating instead. They can accomplish this by entering into a swap where they receive a fixed rate that matches their bond coupon payment, and they pay a floating rate on the swap, such as SOFR plus a spread. This swap structure allows the borrower to capture their funding margin on the floating leg of the swap. The market swap rate in this example is quoted at 4.04% to 4.06%. Here the market makers bid rate of 4.04%, which they would pay on the fixed leg of an ordinary interest rate swap at the moment. However, since the borrower requires a higher fixed rate of 4.5%, which is 46 basis points above the market rates, the market maker adds a spread of 46 basis points per annum or bp pa to the floating leg to ensure the swap achieves a zero net present value. This spread represented here as x equals 46 basis points per annum adjusts the floating payments so that the fixed leg of 4.5% matches the bond coupon of 4.5%, resulting in a balanced swap structure. As we see in the diagram, the borrower's fixed rate bond is converted into a synthetic floating rate liability by using the swap. The borrower effectively pays SOFR plus 46 basis points per annum with the fixed 4.5% payments on the swap, canceling out the fixed 4.5% payments on the bond. This setup allows the borrower to benefit from a floating rate while issuing a fixed rate bond, which is often more appealing to bond investors.