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Floating Rate Note Pricing

Bond Pricing functions support the pricing and risk management for floating rate note instruments (FRN's). Like standard fixed-coupon bonds, FRN's are debt instruments that make periodic coupon payments. However, for FRN's, each payment amount is dependent on the (uncertain) level of a pre-specified reference index. The rate reset date is almost always at the beginning of the coupon period, and a margin is quite commonly added to the observed reference rate.

 

Resolution supports two broad calculation types:

 

 

Calculation Approach

Pricing Function

Template

 

 

.

 

 

1.

Formula - Constant Future Coupons

 

oFRNstd_Price( )

FRN1 - Standard (Formula)

 

 

2.

Iterative - Projected Future Coupons from Zero Curve

 

oFRNctm_Price( )
oFRNctm2_Price( )

FRN1 - Standard (Projected)
FRN2 - Custom 1
FRN3 - Custom 2

 

 

 

 

 

The choice of the most appropriate function is dependent on the complexity of the FRN under consideration. The features of each function are set out below:

 

 

FRN Feature

oFRNstd_Price

oFRNctm

oFRNctm2

 

 

.

 

 

Projected coupon payments

No

Yes

Yes

 

 

Amortizing / Accreting notional FV

No

Yes

Yes

 

 

Reset frequency different from coupon frequency

No

Yes

Yes

 

 

Support for stub first or last periods

No

No

Yes

 

 

Support for ex-dividend period

No

No

Yes

 

 

Ability to generate coupon payment cycle forward from effective date

No

No

Yes

 

 

 

 

 

 

 

In This Section

Background to Floating Rate Note Pricing

Floating Rate Note Pricing Functions

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