Floating-rate notes coupon payment

A fixed-rate bond pays fixed coupons during the bond s life known with certainty. Conversely, a floating-rate note ox floater pays variable coupons linked to a reference rate. This makes the coupon payments uncertain. The main pim-pose of this debt instrument is to hedge the risk of rising interest rates. Although the financial crisis and liquidity provided by central banks have decreased the level of interest rates, they will at some point of course rise in future years. 

The authors find that conversely to the price of a fixed-rate coupon payment, which is a decreasing function of the maturity T, with floating-rate notes, the value depends on the level of interest rates. In fact, when the interest rate is below the long-run average value, the increase of T reduces the value of the floater and vice versa. In addition, the price of a floating-rate note increases with rising risk-free interest rates. 

The pricing of a floating-rate note at issue does not differ from a conventional bond. In fact, it is the present value of coupon payments and principal repayment and is given by (10.3) ... 

Current pt. Current-pay bonds have been issued in Turkey. They are similar to interest-indexed bonds in that their redemption payments at maturity are not adjusted for inflation. They differ, however, in their term cash flows. Current-pay bonds pay an inflation-adjusted coupon plus an indexed amount that is related to the principal. In effect, they are inflation-indexed floating-rate notes. 

Note that the swap PVBP, 425, is lower than that of the 5-year fixed-coupon bond, which is 488.45. This is because the floating-rate bond PVBP reduces the risk exposure of the swap as a whole by 63.45. As a rough rule of thumb, the PVBP of a swap is approximately the same as that of a fixed-rate bond whose term runs from the swaps next coupon reset date through the swap s termination date. Thus, a 10-year swap making semiannual payments has a PVBP close to that of a 9.5-year fixed-rate bond, and a swap with 5.5 years to maturity has a PVBP similar to that of a 5-year bond. 

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