pricingFRN {bondAnalyst} R Documentation

## Calculates Price of a Floating-Rate Note (FRN).

### Description

Calculates Price of a Floating-Rate Note (FRN).

### Usage

pricingFRN(estRtrn, t, mv, maturityPeriod, estDisc)


### Arguments

 estRtrn A vector. t A vector. mv A number. maturityPeriod A number. estDisc A number.

### Details

Floating-rate notes are very different from a fixed-rate bond. The interest payments on a floating rate note, which often is called a floater or an FRN, are not fixed. Instead, they vary from period to period depending on the current level of a reference interest rate. The interest payments could go up or down; that is why they ⁠“⁠float.⁠"⁠ In principle, a floater has a stable price even in a period of volatile interest rates. With a traditional fixed-income security, interest rate volatility affects the price because the future cash flows are constant. With a floating rate note, interest rate volatility affects future interest payments. The valuation of a floating rate note needs a pricing model. Suppose that the yield spread required by investors is 40 bps over the reference rate, DM = 0.0040. The assumed discount rate per period is 0.825 percent. For N = 4, the FRN is priced at 100.196 per 100 of par value. This floater is priced at a premium above par value because the quoted margin is greater than the discount margin (Adams & Smith, 2019). Based on the information provided, the method pricingFRN() is developed to compute Price of a Floating-Rate Note (FRN) for the values passed to its five arguments. Here, estRtrn is a vector of estimated returns on FRN (this does not include repayment of the principal), t is a vector of number of years ranging from 1 to any specified number of periods, mv represents Maturity Value, maturityPeriod is number of evenly spaced periods to maturity, and estDisc is assumed discount rate per period. The given examples show various ways in which the arguments can be passed to pricingFRN().

### Value

Input values to five arguments estRtrn ,t, mv, maturityPeriod, and estDisc.

### Author(s)

MaheshP Kumar, maheshparamjitkumar@gmail.com

### References

Adams,J.F. & Smith,D.J.(2019). Introduction to fixed-income valuation. In CFA Program Curriculum 2020 Level I Volumes 1-6. (Vol. 5, pp. 107-151). Wiley Professional Development (P&T). ISBN 9781119593577, https://bookshelf.vitalsource.com/books/9781119593577

### Examples

pricingFRN(estRtrn=c(0.875,0.875,0.875,0.875),t=c(1,2,3,4),mv=100,maturityPeriod=4,estDisc=0.00825)
pricingFRN(estRtrn=c(0.875,0.875,0.875,0.875),t=c(1:4),mv=100,maturityPeriod=4,estDisc=0.00825)
pricingFRN(estRtrn=c(rep(0.875,4)), t=c(1:4),mv=100,maturityPeriod=4,estDisc=0.00825)
pricingFRN(c(rep(0.875,4)), c(1:4),100,4,0.00825)


[Package bondAnalyst version 1.0.1 Index]