- CFA Exams
- CFA Level I Exam
- Study Session 13. Fixed Income (2)
- Reading 34. Valuation and Analysis of Bonds with Embedded Options
- Subject 7. Valuation and Analysis of Capped and Floored Floating-Rate Bonds

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**CFA Practice Question**

The credit quality of a 3-year, floored floater is estimated to match the Libor swap curve, which is assumed to be the same as the par yield curve. The 1-year, 2-year and 3-year par yields are 5.5%, 6% and 6.5%, respectively. The interest rate volatility is 10%. The floater's coupon pays the one-year Libor annually, set in appears, and is floored at 2%. What is MOST LIKELY the value of this floater?

A. $98

B. $100

C. $102

**Explanation:**The value of the floater is $100 because the coupon paid is equal to the discount rate. The floor rate of 2% is too low. With interest rate volatility of 10% the coupon rate will never get to 2%.

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