Practical Guide for Pricing Floating Rate Notes (FRNs)
A floating rate note has variable coupons, depending on a money market reference rate, such as LIBOR, plus a floating spread. When interest rate raises, the coupons of a FRN increases in line with the increase of the forward rates, which means its price remains relatively constant. Therefore, FRNs bear small interest rate risk. On the other hand, FRNs carry lower yields than fixed rate bonds of the same maturity. They also have unpredictable coupon payments. The price of a FRN has very low sensitivity to changes in interest rates because the floating coupon increases but the discounting also increases as interest rate rises. An investor who wants conservative investments may choose floating rate bonds. FRNs become more popular when interest rates are expected to increase. A FRN carry lower yield than fixed rate bonds of the same maturity and has unpredictable coupon payments. This presentation gives an overview of FRNs valuation. You can more information at http://www.finpricing.com/lib/FiFrn.html
Tags:
Bond , Fixedincome security , Floa , Floatingrate note , FRN
By:
davidlee1203
Business & Finance
17 months ago
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Explaining Zero Coupon Bonds and Valuation
A company can raise capital in financial markets either by issuing equities or bonds. A zero coupon bond is a bond that doesn’t pay interest/coupon but instead pays one lump sum face value at maturity. Investors buy zero coupon bonds at a deep discount from their face value. A zero coupon bond generates gains from the difference between the purchase price and the face value while a coupon bond produces gains from the regular distribution of coupon/interest.Zero coupon bonds are issued at a dee
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Bond , Fixed income security , Floa , Floating rate note , FRN
By:
davidlee1203
Business & Finance
17 months ago
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Basis Swap Valuation Practical Guide
A basis swaps is an interest rate swap that involves the exchange of two floating rates, where the floating rate payments are referenced to different bases. Both legs of a basis swap are floating but derived from different index rates (e.g. LIBOR 1 month vs 3 month). Basis swaps are settled in the form of periodic floating interest rate payments. They are quoted as a spread over the reference index. For example, 3month LIBOR is frequently used as a reference. Spreads are quoted over it.A basis swap can be used to limit interest rate risk that a firm faces as a result of having different lending and borrowing rates. Basis swaps help investors to mitigate basis risk that is a type of risk associated with imperfect hedging. Firms also utilize basis swaps to hedge the divergence of different rates. Basis swaps could involve many different kinds of reference rates for the floating payments, such as 3month LIBOR, 1month LIBOR, 6month LIBOR, prime rate, etc. There is an active market for basis swaps. This presentation gives an overview of interest rate basis swap product and valuation model. You can find more information at http://www.finpricing.com/lib/IrBasisSwap.html
Tags:
Bas , Basis swap , Interest rate swap , OTC derivatives , Swaplet
By:
alanwhite
Business & Finance
17 months ago
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Interest Rate Swaption Product and Valuation Practical Guide
An interest rate swaption or interest rate European swaption is an OTC option that grants its owner the right but not the obligation to enter an underlying interest rate swap. There are two types of swaptions: a payer swaption and a receiver swaption.An payer swaption is also called a righttopay swaption that allows its holder to exercise into a swap where the holder pays fixed rates and receives floating rates, while a receiver swaption is also called righttoreceive swaption that allows its holders to exercise into a swap where the holder receives fixed rates and pays floating rates.Swaptions provide clients with a guarantee that the fixed rate of interest they will pay at some of future time will not exceed certain level. This presentation gives an overview of swaption product and valuation. You can find more details at http://www.finpricing.com/lib/IrSwaption.html
Tags:
Financial prod , Interest rate swap , Payer , receiver swaption , swaption
By:
alanwhite
Business & Finance
17 months ago
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Interest Rate Swap Valuation Practical Guide
An interest rate swap is an agreement between two parties to exchange future interest rate payments over a set period of time. It consists of a series of payment periods, called swaplets. The most popular form of interest rate swaps is the vanilla swaps that involve the exchange of a fixed interest rate for a floating rate, or vice versa. There are two legs associated with each party: a fixed leg and a floating leg. Swaps are OTC derivatives that bear counterparty credit risk beside interest rate risk.Interest rate swaps are the most popular OTC derivatives that are generally used to manage exposure to fluctuations in interest rates. Swaps can be also used to obtain a marginally lower interest rate. Thus they are often utilized by a firm that can borrow money easily at one type of interest rate but prefers a different type. They also allow investors to adjust interest rate exposure and offset interest rate risks. Speculators use swaps to speculate on the movement of interest rates. More and more swaps are cleared through central counterparties nowadays (CCPs). This presentation gives an overview of interest rate swap product and valuation model. You can find more information at http://www.finpricing.com/lib/IrSwap.html
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Interest rate swap , OTC derivatives , Pricing model , Swaplet , Valuation
By:
alanwhite
Business & Finance
17 months ago
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Forward Rate Agreement (FRA) Product and Valuation Practical Guide
A forward rate agreement, or FRA, is a forward contract between two parties in which one party will pay a fixed rate while the other party will pay a reference interest rate for a set future period. Similar to a swap, a FRA has two legs: a fixed leg and a floating leg. But each leg only has one cash flow. The party paying the fixed rate is usually referred to as the borrower, while the party receiving the floating rate is referred to as the lender.Some people believe that a FRA is equivalent to a oneperiod vanilla swap. That is not completely true from valuation perspective. A FRA is usually settled and paid at the end of a forwarding period, called settle in arrear, while a regular swaplet is settled at the beginning of the forward period and paid at the end. Strictly speaking, FRAs need convexity adjustment. However, given FRA is such a simple product, the adjustment is very simple as well. This presentation provides an introduction to FRA product and valuation. You can find more information at http://www.finpricing.com/lib/IrFra.html
Tags:
Financial product , Forward rate agreement , Fra , Swaple , Valuation Model
By:
alanwhite
Business & Finance
17 months ago
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