Floating Rate Note Prices
Return to Price Floater calculations
AFIA Perspective
In an attempt to promote consensus and understanding about the ways used to calculate the purchase price of trade finance obligations that carry a floating rate of interest, AFIA suggests the use of any of four options to discount future payments of floating rate note adjustments that are then added to principal to determine price.
Floating Rate Note Pricing
The Price of a floating rate note can be set to the sum of its Principal and three types of payments discounted to the Transaction Date from their Due Dates. The three payment types are: Seller Interest, Differential Interest, and a Base Rate Adjustment.
Seller Interest
This is the interest earned on a note by a selling noteholder from the last rate fixing date to the transaction date, at the note’s All-in rate in effect during the period. The simple interest earned is calculated from the last fixing date, assumed also to be the last interest payment date, up to but not including the Transaction Date. This amount will be due to the selling noteholder on the Transaction Date regardless of how long he has held the note.
Differential Interest
Simple interest is calculated on a note’s Principal, due on each interest payment date following the Transaction Date, using the difference between the Last Fix Margin and the Transaction Margin. When the Transaction Margin is higher, the resulting negative differential adjusts the Price downward, and the note buyer achieves his desired return by paying less for the note.
Base Rate Adjustment
Interest is calculated on a note’s Principal, from the Transaction Date to the next interest payment date using the note’s Base Rate set at the last fixing, less the Base Rate set two days before the Transaction Date. When applied to the Purchase Price of a floating rate note, this adjustment allows the note buyer to fund the purchase at the current cost of funds rather than the cost implicit in the note being purchased. In effect, it places the gain or loss from rate changes on the note seller.
Discounting the Adjustments
Since the adjusting payments are due in the future but are usually settled on the Transaction Date, the amounts due are discounted. Four options are provided to discount them.
Discount using Base Rate and No Compounding
(Simple@BaseRate)
This option calculates simple interest and discounts at the agreed Base Rate (e.g. LIBOR) excluding margin.
Discount Using Base Rate and Semi- Annual Compounding
(Semi-@BaseRate)
This option uses the agreed Base Rate (e.g. LIBOR) as the discount rate, compounds semi-annually and employs the forfaiting convention for the length of the compounding periods. See Terms of Art Compounding Methods, "Round", which specifies how the length of interest compounding periods are determined and the method of applying the rates. "Round" is the forfaiting industry standard.
Discount Using Base Rate Plus Transaction Margin and No Compounding (Simple@BR+Marg)
This option calculates simple interest and discounts at the agreed Base Rate (e.g. LIBOR) plus Transaction Margin.
Discount Using Base Rate Plus Transaction Margin and, Semi-Annual Compounding.
(Semi-Annual@BR+Marg.)
This option discounts using the agreed Base Rate (e.g.LIBOR) plus Transaction Margin, compounds semi-annually, and employs the forfaiting convention for the length of the compounding periods. See Terms of Art Compounding Methods, "Round", which specifies how the length of interest compounding periods are determined and the method of applying the rates. "Round" is the forfaiting industry standard.
Discount-to-yield rates
The two discount rates used in the four options are called Discount-to-Yield (DtY) rates. This means they are applied to the discounted proceeds to calculate an amount of interest. The rates, divided by 360, are applied to each day during the period. The interest, now called a discount, is added to the proceeds to equal the note’s face amount.
A note buyer and note seller may agree that one or more of the payments not be discounted, Seller Interest in particular. This can be accomplished by setting the Base Rate to a negative number offsetting the Transaction Margin, depending on the parameter options chosen.
Floater Price Screen
The screen opens showing data for a sample note, providing the user with a reference point. It illustrates the use of the international dd/mm/yy date format. To calculate the price of a new note, modify the fields with white backgrounds, then press the CALCULATE button. Inputs outside their allowed range will cause an error message to pop up, and the results will be forced to zero. The allowed ranges are found under the Ranges heading of the About Calculations page reached from the Select page.
References
See Terms of Art for definitions of terms used on the Price Floater screen
reached from the Select page.
See User Guide reached from the Select page.