The value of the FRN

by | Mar 3, 2023 | finance

 

A $1000 par floating rate note pays a coupon rate of 180-day LIBOR plus a quoted margin of 1.5% semi-annually. Given that there is exactly 2 years to maturity, and the latest 180day LIBOR is 2.8%, and the discount margin is 1.0%, what is the value of the FRN at this point?

 

 

Sample Solution

Answer: The value of the floating rate note (FRN) at this point can be calculated by first determining the coupon payment that would be received over the remaining two-year period. Since the coupon is paid semi-annually and is based on 180-day LIBOR plus a quoted margin of 1.5%, then each coupon payment would be equal to 0.015*1000 + 2.8*1000 = $4500 per year, or $2250 every 6 months.

Sample Solution

Answer: The value of the floating rate note (FRN) at this point can be calculated by first determining the coupon payment that would be received over the remaining two-year period. Since the coupon is paid semi-annually and is based on 180-day LIBOR plus a quoted margin of 1.5%, then each coupon payment would be equal to 0.015*1000 + 2.8*1000 = $4500 per year, or $2250 every 6 months.

We can now use this information along with the maturity date and discount margin to calculate the present value of all cash flows associated with this FRN which comes out to be 1020 32 (=$4500/(1+0 01)*2) , where 0 01 is discount margin . Therefore total current price bond would equal amount discounted future payments ie 1000 par + 20 32 PV coupons ie 1020 32

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