Interest rate volatility affects the price of a fixed-rate bonds. A floating-rate note (a floater, or an FRN) maintains a more stable price than a fixed-rate note because interest payments adjust for changes in market interest rates. With a floater, interest rate volatility affects future interest payments.

The

The

Unique characteristics:

- Yield measures are annualized but not compounded.
- Often quoted using non-standard interest rates (discount rate or add-on rate? 360-day year or 365-day year? redemption value amount (FV) or price at issuance (PV)?)
- Different periodicities

Money market instruments need to be converted to a common basis for analysis.

Note that the denominator is FV, not PV. The rate of return is therefore understated.

Note the only difference: the denominator is PV, not FV.

90-day T-bill, face value 100, quoted discount rate: 2.5% for an assumed 360-day year.

PV = 100 x (1 - 90/360 x 0.025) = 99.375

To calculate the bond equivalent yield for a 365-day year:

AOR = (365/90) x (100 - 99.375)/99.375 = 2.55%

DannyM: Do we need to memorize equation 8, the valuation of an FRN? |

cfa1980: I doubt it. It's important to understand the relationship, not memorizing the formula. |

robertdole: CFAI notebook has questions on FRN valuation so I imagine you would need to know how to apply the formula |

khalifa92: LOOOL this equation 8 is so simple it makes a person confidence sky rocket to the moon. |

ginarapp1: Can you calculate these with BAI II? |