IFA Example
Return to Floater page.
The
default page for the NotaNet Floater calculation uses the terms
from the International Forfaiting Association (IFA) Guidelines Appendix 3. This page lists the
starting values, the results, and the methods used to obtain them.
The basic terms used when a
note is sold by one holder to the next in a secondary market
transaction are:
Given Terms
| Term |
Value |
Days Since Issue |
Days Since Trans. |
Discount Base (LIBOR) |
| Principal |
1,000,000 |
|
|
| Issued On |
1 January 04 |
|
|
6.875 |
| Sale |
2 April 04 |
92 |
0 |
3.500 |
| Interest Due On |
2 July 04
| 183
| 91
| 3.500 |
| Interest Due On |
31 December 04
| 365
| 273
| 6.500 |
| Int.+Prin.Due On |
2 July 05
| 548
| 456
|
6.500 |
| Margins |
|
|
| |
| Contract, Payment Claim |
|
| 3.000 |
| Transaction, buyer return |
|
| -1.000 |
| Differential Interest |
|
| =2.000 |
| Discount Method |
Base rate, compounded semiannually |
|
|
|
Adjustments, Basic
The price of a floating rate note
sold between rate settings (also interest due dates) is conventionally
the Principal amount plus three adjustments discounted to the purchase
transaction date.
The three adjustments are:
Seller Interest
The amount due to the note seller from the last rate fixing date, the
issue date in this case, to the transaction date. This is determined
by the note’s Principal, number of days held, and the base rate
and contracted Issuer margin applicable to the holding period.
In this example:
1,000,000 x (6.875 + 3.000) x 92/360 = 25,236.11
Base Rate
compensates the note buyer for the (LIBOR) rate being paid by the note
until the next fixing, and the rate on the transaction date.
In this example:
1,000,000 x (6.875 – 3.500) x 91/360 = 8,531.25
Differential Interest
The note buyer is willing to earn a 1% margin during the remaining
life of the note, compared to the 3% margin inherent in the note as
being paid by the Issuer, also called the contract rate. The interest
being earned by the note buyer is thus lower than being paid by the
Issuer and which will be received on future interest payment dates
by the note buyer. Interest and Differential Interest are paid for
periods extending from one payment date to the next. The 2%
differential is realized by the buyer paying more up front for the note.
Differential Interest Adjustments
| Principal |
Diff.Rate |
Days |
Days Basis |
Amount |
| 1,000000 |
x 0.02
| x 91 |
/360 |
5055.56 |
| 1,000000 |
x 0.02 |
x 182 |
/360 |
10,111.11 |
| 1,000000 |
x 0.02
| x 183 |
/360 |
10,166.67 |
| Total
| |
|
|
25,333.34 |
Adjustments, Discounted
The raw adjustments, calculated above, are due on future
dates but are conventionally settled earlier, on the transaction
(purchase) date. To summarize, they are:
Adjustments Before Discounting
| Adjustment |
Expected |
Days |
Amount |
| Seller Int. |
2 July 04
| 91 |
25,236.11 |
| Base Rate |
2 July 04 |
91 |
8,531.25 |
| 1st Int.Pmt. |
2 July 04
| 91 |
5,055.56 |
| 2nd Int.Pmt.
| 31 Dec 04 |
273 |
10,111.11 |
| 3rd Int.Pmt.
| 2 July 05 |
456 |
10,166.67 |
The raw amounts are discounted back to the settlement date using
the compounding periods of 183 days, 182 days, and remaining days as applicable.
Value on Transaction Date = Raw Adjustment/Compound Interest Factor.
The particular periods result in the compound interest factors
and transaction date value of:
Discounted to Tran. Date
| Adjustment |
Amount |
Factor |
SubTotl |
Value |
| Seller Int. |
25,236.11 |
1.008 847 |
|
25,014.80 |
| Base Rate |
8,531.25 |
1.008 847 |
|
8,456.43 |
| 1st Int.Pmt. |
5,055.56 |
1.008 847
| 5,011.22 |
|
| 2nd Int.Pmt.
| 10,111.11
| 1.049 829 |
9,631.20 |
|
| 3rd Int.Pmt.
| 10,166.67
| 1.084 520 |
9,374.35 |
|
| Subtotal
|
| |
|
24,016.77 |
| Totals
| 59,100.70
| |
|
57,488.00 |
The note is priced at:
Adjusted Price
| Item |
Amount |
| Principal |
1,000,000.00
|
| Seller Interest |
25,014.80 |
| Base rate adj |
8,456.43
|
| Diff. Interest |
24,016.77
|
| PRICE |
1,057,488.00
|
By discounting the
adjustments to the transaction date, the buyer will pay 1,612.70
less because he is paying earlier.
Buyer Saving
| Adjustment |
Expected |
| Raw value |
59,100.70
|
| Discounted |
-57,488.00 |
| Saving |
1,612.70
|
The calculator is initialized to the values
used in this example. To see the undiscounted values, set the
rates in the Disc.Base column in the sand-colored table to zero.
If acceptable to the note seller, the
adjustments might have been discounted at a different rate such
as LIBOR at average life of the future payments, the all-in
contract rate, or some other rational or irrational rate. The
calculation facilitates these alternatives by providing for
user input of individual discount rates.