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FRN - Different Coupon Rates & Exact Coupon Periods

This valuation approach requires the availability of an appropriate curve from which forecasts for all future rate resets can be derived. These rates, or those derived from a separate curve, are also used as the 'base' rates for the discount factors used to compute the present value of each coupon payment.

 

The dirty price for an FRN under this pricing approach can still be calculated using the pricing equations under the equal/exact assumption, but with some redefinitions for the coupon amount formulas. For convenience, the equation is given below:

Equation Template

If the rate reset frequency is the same as the payment frequency, then coupon amounts are determined as:

Equation Template

r1 = the observed rate reset at the preceding rate reset date.

rif = the forecast rate reset for the rate reset date.

 

In cases where the rate resets occur more frequently than the coupon payments, the coupon rate is computed as:

Equation Template

k = number of rate resets within the current payment period.

mr = quoted margin that is applied to each rate reset.

mc = quoted margin that is applied to the compounded coupon rate.

 

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