Question
Heres the initial spot LIBOR curve: 1 yr 2% 2 yr 2.5% 3 yr 3% 4 yr 3.4% 1) Calculate the price of a 4-yr
Heres the initial spot LIBOR curve:
1 yr 2%
2 yr 2.5%
3 yr 3%
4 yr 3.4%
1) Calculate the price of a 4-yr (annual pay) Floating Rate Note paying LIBOR + 2%, assuming initially that the markets required spread for this issuer is 2%.
After the FRN is issued (but prior to the first coupon being set), the LIBOR curve changes to:
1 yr 3%
2 yr 3.5%
3 yr 3.75%
4 yr 4%
2) Calculate the new price assuming the markets required spread remains 2%.
3) Go back to the initial LIBOR curve (in I). After the FRN is issued the market reassesses and demands a 4% spread over LIBOR for this issuer. What happens to the price?
4) Continue with III. The bonds price is no longer par due to the change in required spread. Subsequent to this, the LIBOR curve shifts from the situation in I to II. Whats the new price?
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