Interest rates reset date

Typically, the cap rate is compared with the indexed interest rate on the rate-reset dates—semiannually, for instance, if the reference rate is sbc-month LIBOR. The cap actually consists of a strip of individual contracts. 

Thus far our coverage of valuation has been on fixed-rate coupon bonds. In this section we look at how to value credit-risky floaters. We begin our valuation discussion with the simplest possible case—a default risk-free floater with no embedded options. Suppose the floater pays cash flows quarterly and the coupon formula is 3-month LIBOR flat (i.e., the quoted margin is zero). The coupon reset and payment dates are assumed to coincide. Under these idealized circumstances, the floater s price will always equal par on the coupon reset dates. This result holds because the floater s new coupon rate is always reset to reflect the current market rate (e.g., 3-month LIBOR). Accordingly, on each coupon reset date, any change in interest rates (via the reference rate) is also reflected in the size of the floater s coupon payment. 

The second methodology uses market data on actively traded interest rate caps to form an estimate of a and O. An interest rate cap comprises q caplets, where q is the number of reset dates. Each caplet corresponds to the rate at time and provides payoff at time An interest rate cap provides insurance against adverse upward movements in floating-rate obligations during a future period. An interest rate caplet provides the cap holder with the following payoff ... 

Generally, the reference rate for FRNs is LIBOR, the London interbank offered rate—that is, the rate at which one bank will lend funds to another. The interest rate is fixed for a three- or six-month period, at the end of which it is reset. If, say, LIBOR is 7.6875 percent at the coupon reset date for a sterling FRN paying six-month LIBOR plus 0.50 percent, the FRN will pay 8.1875 percent for the following period, and interest will accrue at a daily rate of 0.0224315. 

CPI is the next coupon payment (that is, Cis the reference interest rate on the last coupon reset date plus... 

Here we review some of the terminology used in the swaps market and explain how swaps are quoted. The date that the counterparties commit to the swap is called the trade date. The date that the swap begins accruing interest is called the effective date, while the date that the swap stops accruing interest is called the maturity date. How often the floating rate is changed is called the reset frequency. 

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