A floating-rate note has par value of $100, matures in 5 years, pays interest semi-annually based on 3-month LIBOR + 50 bps and has a discount margin of 200 bps (2%). Assume that today 3-month LIBOR is 8%. • What is the price of the floating-rate note today?
A. 93.11
B. 91.55
C. 94.21
D. None of the above
Periodic payment =
Where, QM is quoted margin
FV is future value
m is number of periods in a year
Semi-annual payment
= 4.25
Periodic discount rate = (Libor + DM)/m
Where, DM is the discount margin
Therefore, Semi-annual discount rate = (0.08 + 0.02)/2
= 0.05 or 5%
Number of periods to maturity = 5*2
= 10
The price floating rate Bond today is calculated using PV function in excel
Therefore, the correct option is C.
Get Answers For Free
Most questions answered within 1 hours.