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Jan_Roman
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Posts: 2
Joined: April 13th, 2021, 1:04 pm

FRN in a multiple curve framework

April 27th, 2021, 1:34 pm

Hi,
Im dealing with valuation of Floating Rate Notes and calculate:
1.) The Present Value
2.) Discount Margin
3.) Modified Duration
In a multiple curve framework. I.e., when you generate the cash-flows with a Swap Curve (or any floating rate curve) and discount with e.g., a Government curve + Discount Margin.
I guess the best discount curve for bonds and FRN's are Government curves + spread due to bonds vs. bonds.
I have seen similar questions before but where the generating curve and the discount curve are the same (the old way of thinking?).
Senior Risk Analyst, Senior Financial Engineer & Senior Lecturer. Published two books, Analytical Finance I & II.
 
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Hymn
Posts: 8
Joined: February 27th, 2012, 1:52 pm

Re: FRN in a multiple curve framework

May 6th, 2021, 3:03 pm

Hi,
the Government curve could be use as base curve, then you have to add a credit spread that capture the issuer riskeness over the Government, for that you can use the Z-spread over the government bond of a listed bond with the same issuer and characteristics of the bond that you are valuing. The Z-spread include also the liquidity spread because it's computed starting from market price. 
 
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Jan_Roman
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Posts: 2
Joined: April 13th, 2021, 1:04 pm

Re: FRN in a multiple curve framework

May 11th, 2021, 9:52 pm

Hi, I have solved the problem by defining the spread between the index curve (LIBOR) and the treasury curve. Then using the total spread above the index curve as the Discount Margin. In that way I found the price at a reset as 100 + an annuity paining the difference between between the Reset Margin (the Quoted Margin) and the Discount Margin. Then I also found that the Modified Duration = Spread Duration + Index Duration. Also the Index Duration can be positive and negative depending on the value Reset Margin minus Discount Margin. 
Senior Risk Analyst, Senior Financial Engineer & Senior Lecturer. Published two books, Analytical Finance I & II.