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Floating rate notes (FRNs) are bonds that have a variable coupon, equal to a money market reference rate, like SOFR or federal funds rate, plus a quoted spread (also known as quoted margin). The spread is a rate that remains constant.
The HJM framework originates from the work of David Heath, Robert A. Jarrow, and Andrew Morton in the late 1980s, especially Bond pricing and the term structure of interest rates: a new methodology (1987) – working paper, Cornell University, and Bond pricing and the term structure of interest rates: a new methodology (1989) – working paper ...
Stochastic Calculus for Finance I: The Binomial Asset Pricing Model. Springer. ISBN 978-0387249681. Donald J. Smith (2017). Valuation in a World of CVA, DVA, and FVA: A Tutorial on Debt Securities and Interest Rate Derivatives. World Scientific. ISBN 978-9813222748. John van der Hoek & Robert J. Elliott (2006). Binomial Models in Finance. Springer.
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The total rate paid by the customer varies, or "floats", in relation to some base rate. The term of the loan may be substantially longer than the basis from which the floating rate loan is priced; for example, a 25-year mortgage may be priced off the 6-month prime lending rate. Floating rate loans are common in the banking industry and for ...
Rational pricing is the assumption in financial economics that asset prices – and hence asset pricing models – will reflect the arbitrage-free price of the asset as any deviation from this price will be "arbitraged away". This assumption is useful in pricing fixed income securities, particularly bonds, and is fundamental to the pricing of ...
The purchase price of a cap is a one-off cost and is known as the premium. [1] The purchaser of a cap will continue to benefit from any rise in interest rates above the strike price, which makes the cap a popular means of hedging a floating rate loan for an issuer. [1]
With an inverse floater, as interest rates rise the coupon rate falls. [1] The basic structure is the same as an ordinary floating rate note except for the direction in which the coupon rate is adjusted. These two structures are often used in concert. As short-term interest rates fall, both the market price and the yield of the inverse floater ...