EXAMPLE: Valuation of an FRN
A $100,000 FRN with a semiannual coupon pays a 180-day MRR plus a quoted margin of 120 basis points. On a reset date with five years remaining to maturity, the 18
EXAMPLE: Valuation of an FRN
A $100,000 FRN with a semiannual coupon pays a 180-day MRR plus a quoted margin of 120 basis points. On a reset date with five years remaining to maturity, the 180-day MRR is quoted as 3.0% (annualized), and the discount margin (based on the issuer’s current credit rating) is 1.5% (annualized). Estimate the value of the FRN.
Answer:
The current annualized coupon rate on the note is 3% + 1.2% = 4.2% so the next semiannual coupon payment will be (4.2%) / 2 = 2.1% of face value.
The required return in the market (MRR + discount margin) as an effective 180- day discount rate is (4.5%) / 2 = 2.25%
Using a face value of 100%, 10 coupon payments of 2.1%, and a discount rate per period of 2.25%, we can calculate the present value of the FRN as:
N = 10 I / Y = 2.25 FV = 100 PMT = 2.1; CPT → PV = -98.67
By this method, we can estimate current value of the note as 98.67% of its face value, or $98,670.
The question is why are we using FV to be 100 instead of 100,000. On using 100000 as FV , PV will be 80069.63 and not 98670 totally different results
Madhu Chandarasekaran, CFA.
vignesh k
EXAMPLE: Valuation of an FRNMadhu Chandarasekaran, CFA