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What is a Floating Rate Note (FRN)?
A leveraged or super floater gives the investor increased exposure to an underlying index: Leveraged floaters also require a floor, since the coupon rate can never be negative. FRNs carry little interest rate risk. When market rates rise, the expected coupons of the FRN increase in line with the increase in forward rates, which means its price remains constant. Thus, FRNs differ from fixed rate bonds, whose prices decline when market rates rise.
As FRNs are almost immune to interest rate risk, they are considered [ by whom? The risk that remains is credit risk. Securities dealers make markets in FRNs. They are traded over-the-counter , instead of on a stock exchange. In Europe, most FRNs are liquid, as the biggest investors are banks.
In the wholesale markets, FRNs are typically quoted as a spread over the reference rate. If a trade is agreed, the price is calculated. This can be calculated as par, minus the difference between the coupon and the price that was agreed 0. The simple margin is a measure of the effective spread of a FRN that is not traded at par. If the FRN trades at par, the simple margin will equal the quoted spread. To calculate the simple margin, first compute the sum of the quoted spread of the FRN and the capital gain or loss a investor will earn if the FRN is held to maturity:.
Second, adjust the above for the fact that the FRN is bought at a discount or premium to the nominal value:. A more complex measure of the effective spread is a discount margin , which takes into account the "time value of money" of the FRN cash flows. The formula for the calculation of the discount margin is more complex and its calculation generally requires a financial calculator or a computer.
From Wikipedia, the free encyclopedia. Foreign exchange Currency Exchange rate. The risk that remains is credit risk. Securities dealers make markets in FRNs. They are traded over-the-counter , instead of on a stock exchange. In Europe, most FRNs are liquid, as the biggest investors are banks. In the wholesale markets, FRNs are typically quoted as a spread over the reference rate. If a trade is agreed, the price is calculated. This can be calculated as par, minus the difference between the coupon and the price that was agreed 0.
Here the capital gain or loss of the FRN is taken into account, and divided over the total number of years until maturity. The simple margin is calculated as this "effective spread" adjusted for the fact that we buy the FRN at a discount or premium to the nominal value:. This entry is from Wikipedia, the leading user-contributed encyclopedia.
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Asset-backed security Collateralized debt obligation Collateralized mortgage obligation Commercial mortgage-backed security Mortgage-backed security Yield-curve spread. Callable bond Convertible bond Embedded option Exchangeable bond Extendible bond Option-adjusted spread Puttable bond.