Valuing Floating-Rate Notes and Interest Rate Caps and Floors

Donald J Smith

Chapter 3 in Valuation in a World of CVA, DVA, and FVA:A Tutorial on Debt Securities and Interest Rate Derivatives, 2017, pp 47-71 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Floating-rate notes (called FRNs or just “floaters”) were introduced in the 1970s to offer bond investors protection from higher market interest rates resulting from higher inflation, which reached double digits levels in those years. On a traditional fixed-rate bond, rate volatility is manifest entirely in the price of the security because its scheduled interest payments are fixed. Naturally, higher market rates lead to falling bond market values. A floater, on the other hand, transfers that interest rate volatility to future cash flows, thereby minimizing current price fluctuations and preserving capital value for investors. Of course, an FRN is still subject to price movements arising from changes in credit risk…

Keywords: XVA; CVA; DVA; FVA; Debt Securities; Interest Rate Derivatives (search for similar items in EconPapers)
JEL-codes: G10 (search for similar items in EconPapers)
Date: 2017
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