Question

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

Answer 1

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.

answered by: anonymous