Valuing a Floating Rate Note (FRN)
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1. Context
In this short video from FRM Part 1 curriculum, we derive the value of a Floating Rate Note (FRN) – both on a coupon / reset date as well as at any point in time between two coupon dates. Through very simple steps, we prove the rule of thumb that on a coupon date, the ex-coupon value of the FRN equals its face (par) value, provided the reference rate of the FRN is the same as the discount rate. Based on the value of the FRN, we work out the duration of the FRN, a concept that we will use to compute the duration of a fixed-for-floating Interest Rate Swap. The details of the readings in which this topic appears are given below:
| Area | Financial Markets and Products |
| Reading | Swaps |
| Reference | John C. Hull, Chapter 7. Swaps In Options, Futures, and Other Derivatives, 10th Edition, (New York: Pearson, 2017). |