Question

Show how a floating rate bond is priced (to keep this as simple as possible, use periodic interest rates)

Answer 1

The pricing of the floating rate bond is simple as the future coupon rate and the discount rate for the coupon payment and principal is determined based on the future market rates only.

So the immediate price is determined by the prevailing discount rate and the market rate with the assumption that the coupon and the principal are paid at the same time.

Price = Coupon*Principal/(1+ discount rate) + Principal/(1+discount rate)

For period 1,

P1 = C1*N/(1+r1) + P/(1+r1)

For period 2,

P2 = C2*N/(1+r2) + P/(1+r2)