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FRN Pricing Formulas

The price and yield calculations for FRN's can be based on the following three sets of assumptions (amongst others):

  • Equal Coupon Rates and Equal Coupon Periods: The constant coupon rate used in the calculation of coupon amounts can be based on any number of observed or forecast reference index values. Because the coupon periods are assumed to have the same length (aside from the current period) the coupon amounts will be equal.
  • Equal Coupon Rates and Exact Coupon Periods: The start and end dates of each coupon period are adjusted for the selected business day convention, and the coupon amounts are then based on each period's specific length. This means that the valuation procedure must discount each of the coupon payments separately. As such, this approach is capable of handling accreting and amortizing FRN's.
  • Different Coupon Rates and Exact Coupon Periods: Under this set of assumptions, the forward reference rate for each coupon period must be derived from an appropriate rate curve.

Bond Pricing functions support the price and yield calculations for all three assumptions, amongst others.

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