NPV of a floating rate note.

Toothless68 · July 1st, 2011, 7:25 am

Hi. Straightforward question here, but one that has been bugging me. How do I calculate the NPV of a floating rate note? I've read somewhere that it's the discounted value of the principle at the next reset date, which would make the calculation Notional/(1+discount_rate+spread), which seems counter-intuitive as it doesn't take into account the maturity. Can someone enlighten me here? Thanks

CRMsquared · July 1st, 2011, 10:42 am

Check out the riskmetrics document pages 121-123... http://citeseerx.ist.psu.edu/viewdoc/do ... 1&type=pdf

Aaron · July 3rd, 2011, 1:43 pm

This formula assumes that the value of the floating rate note will reset to par at the reset date. That is not necessarily true in theory and certainly not in practice. However, if it were true, it makes the floating rate not equivalent to a zero coupon bond that pays par plus the next interest payment (assuming this pays in arrears) at the next reset date. The future cash flows don't matter, you know their forward value at the next reset date.