In 2007, FINCAD Analytics Suite introduced a new workbook to price floating rate notes where the reset rate (i.e., reference rate) fixing occurs less frequently than the payments.

There are many different types of floating rates notes that are available in the market place. Three common types are:

• FRNs where the payment and reset frequency are the same
• FRNs where the reset rate fixing is more frequent than payments (the payment is based on the compounded or average rate)
• FRNs where the reset rate fixing is less frequent than payments

Prior to the 2007 release, FINCAD Analytics Suite had workbooks that were able to price the first two. This article looks at the new workbook where the reset rate is fixed less frequently than payments occur.

» FINCAD offers a free trial of the lastest version and a customized demo of FINCAD Analytics Suite. Click here to start your trial!

FINCAD Workbook

A typical example of this would be where the payment frequency is monthly but the reset frequency is quarterly. This implies that the reference rate which is set at the beginning of the quarterly period will be applied to each of the next three monthly payment periods.

The main functions used in the workbook are:

aaFRNavg_fs - outputs the fair value (clean and dirty) and various yield statistics

aaFRNavg_fs_cf - displays various table outputs including implied rates, coupons and cashflow dates

These functions, and others with the _fs suffix, are freestyle functions in the FINCAD Analytics Suite library. The idea beind a freestyle function is that the user has complete control over the schedules required by the function. In the functions used in this workbook, this means that the user can create any set of reset rate periods and payment periods when pricing their FRN. To assist the user, utility functions exist to help create these date tables. The utility functions used in this workbook are:

aaFRNavg_Tables_fs - used in generating the coupon payment date table

aaFRN_Tables2 - used in generating the reset date table

Additional Features

The new FINCAD Analytics Suite workbook also has many other features. These include the ability to:

• Price an FRN with an amortizing / accreting notional
• Make payments in addition to the scheduled coupon payments (fixed payment amount column)
• Add a margin to the reset rate
• Overwrite the dates in the coupon payment and rate reset table to create your own custom FRN

Disclaimer

Your use of the information in this article is at your own risk. The information in this article is provided on an "as is" basis and without any representation, obligation, or warranty from FINCAD of any kind, whether express or implied. We hope that such information will assist you, but it should not be used or relied upon as a substitute for your own independent research.

For more information or a customized demonstration of the software, contact a FINCAD Representative.