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Value of floating rate bond

B

BeckyBoo

Member
Please can someone explain to me why the value of the floating rate bond in X3.1(iv) is equal to the principal amount.

Many thanks
 
floating rate bond

Hi, This is mentioned in the core reading, that a floating rate bond, where the coupons are LIBOR, when it is valued by discounting at LIBOR rates, will have value = nominal value. The assumption is that the valuation date is on a coupon payment date and that we have a full period to go until the next coupon, but this is valid in X3.1. Essentially it is a voyage of Columbus: if you have a series of LIBOR rates in the future, and you use those to estimate forward rates as a best guess of what the LIBOR coupons are going to be. Then you discount those coupons at LIBOR rates, including the nominal payment at the end, you will get 100 no matter how long the bond's term is. Hope this helps.
 
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