Structured Notes

Donald J Smith

Chapter 7 in Valuation in a World of CVA, DVA, and FVA:A Tutorial on Debt Securities and Interest Rate Derivatives, 2017, pp 163-182 from World Scientific Publishing Co. Pte. Ltd.

Abstract: The binomial forward rate tree model is quite general and can be used to value a wide range of debt securities and interest rate derivatives. This chapter extends the analysis to structured notes, in particular, to an inverse floating-rate note and a bear floater. These securities were introduced in the 1980s during a wave of financial market innovation, motivated in part by the extreme interest rate volatility experienced in the U.S. in those years and the diversity of opinion about future rate movements. Inverse floaters, also known as bull floaters, are attractive to investors who expect interest rates to be low, hence a bull market for bond prices. Bear floaters are attractive to investors who expect rates to be going up, a bear market for bond prices.

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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