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    Floating Rate Notes (FRN) : Be Aware

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    Sibiya Zaman Adiba
    Floating rate notes (FRNs) are valued based on a spread over a reference rate, typically LIBOR. The quoted margin refers to the yield spread over the reference rate, while the required margin refers to the yield spread needed for the bond to be valued at par on the reset date. The value of an FRN depends on whether the required margin is greater than, less than, or equal to the quoted margin, which impacts whether the FRN will trade at a discount, premium, or par. Formulas are provided to calculate cash flows, discount rates, and the value of an FRN.

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    Floating Rate Notes (FRN) : Be Aware

    Uploaded by

    Sibiya Zaman Adiba
    22 views2 pages
    Floating rate notes (FRNs) are valued based on a spread over a reference rate, typically LIBOR. The quoted margin refers to the yield spread over the reference rate, while the required margin refers to the yield spread needed for the bond to be valued at par on the reset date. The value of an FRN depends on whether the required margin is greater than, less than, or equal to the quoted margin, which impacts whether the FRN will trade at a discount, premium, or par. Formulas are provided to calculate cash flows, discount rates, and the value of an FRN.

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    VAL FRB

    Original Title

    VAL FRB

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    Floating rate notes (FRNs) are valued based on a spread over a reference rate, typically LIBOR. The quoted margin refers to the yield spread over the reference rate, while the required margin refers to the yield spread needed for the bond to be valued at par on the reset date. The value of an FRN depends on whether the required margin is greater than, less than, or equal to the quoted margin, which impacts whether the FRN will trade at a discount, premium, or par. Formulas are provided to calculate cash flows, discount rates, and the value of an FRN.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    22 views2 pages

    Floating Rate Notes (FRN) : Be Aware

    Uploaded by

    Sibiya Zaman Adiba
    Floating rate notes (FRNs) are valued based on a spread over a reference rate, typically LIBOR. The quoted margin refers to the yield spread over the reference rate, while the required margin refers to the yield spread needed for the bond to be valued at par on the reset date. The value of an FRN depends on whether the required margin is greater than, less than, or equal to the quoted margin, which impacts whether the FRN will trade at a discount, premium, or par. Formulas are provided to calculate cash flows, discount rates, and the value of an FRN.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 2

    Floating Rate Notes (FRN)

    FRN are valued based on a spread over a reference or “index” rate, (ie. LIBOR).

    The term “quoted margin” refers to the specific yield spread over the reference
    rate and the term “required margin” (or “discount margin”) refers to the yield
    spread making the bond valued at par on the reset date.

    Be Aware:

    The quoted margin, which is the spread over the reference rate, can be positive or
    negative!

    Changes in the required margin result from changes in the issuer’s credit quality.

    Quick Points to Know:

    If the required margin is greater than the quoted margin, the FRN will be
    priced at a discount

    If the required margin is less than the quoted margin, the FRN will be priced
    at a premium

    When the required margin is equal to the quoted margin, the floater will be
    priced at par

    Arrears – means the reference rate is determined at the beginning of the


    period and the interest payment is made at the end of the period.

    Formulas to Know:

    Cash flow per time period:


    = [(Reference Rate + Quoted Margin) x (Face Value)] / Payment Frequency

    Discount rate per time period:


    = (Reference Rate + Require Margin) / Payment Frequency

    Value of a FRN:
    = Present Value of each Cash Flow using the Discount rate per time period

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