Valuation of Floating Rate Notes: Perfect Floaters and Synthetic Alternatives, Monografías, Ensayos de Finanzas

¡Descarga Valuation of Floating Rate Notes: Perfect Floaters and Synthetic Alternatives y más Monografías, Ensayos en PDF de Finanzas solo en Docsity! 1 Floating Rate Notes Suggested textbook readings: pp. 374-376 2 Highlights • Valuation of a perfect floater • Features of real-world floaters 5 Synthetic alternative II • Bought US$100MM 2-year FRN a month ago • Pays 6 month libor + 75bp, every 6 months. • Initial value of reference rate: 2.05%. Assume 183 days is the first coupon period. 6 Synthetic alternative II • To value, lets decompose it into four pieces: – A cash flow of USD101.42MM to be received in five months. – A forward contract to invest USD 100MM for a period of six months starting five months from today. The interest rate will be the value of 6-month Libor at the start of that period. – A forward contract to invest USD 100MM for a period of six months starting eleven months from today. The interest rate will be the value of 6-month Libor at the start of that period. – A forward contract to invest USD 100MM for a period of six months starting seventeen months from today. The interest rate will be the value of 6-month Libor at the start of that period. 7 Synthetic alternative II • Value of the FRN will simply be the sum value of these four components • Forwards: These aren't standard forward rate agreements, which lock in a future interest rate. Instead, these simply guarantee to pay whatever Libor rate is quoted in the market at the onset of their respective interest periods. How much are these guarantees worth? The answer is nothing. All three forwards have no value. • Market value of the FRN is discounted value of coupon payment plus principal.