CFA Level 2 | Fixed Income: Valuing a Capped Floater

[@wassiouakadiri6552]

Thank you Sir,

[@FabianMoa]

You're welcome, Wassiou 😎

[@joshuaowen7409]

Youre a boss

[@FabianMoa]

Thank you! Remember to subscribe to my channel for more related videos.

[@VannAleXX]

Hi, why are you discounting the cash flows back by LIBOR+200 bips if it’s just the coupon rate that is increased by 200 bips? It doesn’t appear that the actual interest rates changed.

[@FabianMoa]

The straight floater must have a value equals to the notional amount at the inception and at every coupon payments. To force that to happen, the coupon rate must be equal to the discount rate, hence why the discount rate is also set to LIBOR + 200 bps.

[@tubuladude]

If the coupon is capped shouldn't the value of the embedded cap be negative (Vsf-Vcf) since the capped floater is worth less to an investor than the straight floater? Love the videos.

[@FabianMoa]

Hi tekez, The value of the call option is expressed as a positive value. The formula to link the two floaters are: V(Capped floater) = V(Straight floater) - V(Call option) So: V(Call option) = V(Straight floater) - V(Capped floater)

[@tubuladude]

@@FabianMoa ok thanks, worded like this it makes sense