Microsoft PowerPoint - PoF.ppt

Definitionƒ 122

Coupon is not fixed but floating, i.e.

coupon is reset

periodically

ƒ

Reference rate

:

money market rate (LIBOR) or capital

market rate (CMT)

; The maturity of the reference rate

corresponds to the length of the coupon/reset period (... natural time lag)

ƒ

Reset date

: in advance (usually)

ƒ

Additional features: cap

(upside limited, e.g. c = min (LIBOR,

7%));

floor

(downside limited, e.g. c = max (LIBOR, 2%)),

margin

(changed by a fixed amount, e.g. c = LIBOR + 50bp)

Multi-period deterministic ca

sh flows: FRNs - Definition