How to Calculate Floaters
“Floater” is short for floating rate note. These notes are bonds that pay out interest payments to the bond holders at pre-set intervals — a typical term is every three months. The interest rate paid “floats” in that it is tied to two separate factors, at least one of which fluctuates.
For instance, the interest rate for a floater may be determined both by LIBOR (London Interbank Offered Rate) + 2%. To calculate a floater, you must know the standards that being used to dictate the float.
3 Steps to Calculate Floaters
1. Find the floater terms.
These should be made clear at the time of purchase and can be found in the paperwork for the purchase of the floater. These terms will spell out when the interest payments are made and which factors are used to determine the floating rate — i.e., LIBOR plus 2%.
2. Calculate the interest rate the time of payment.
When an interest payment is due, find the current value of the fluctuating factor and add any base interest rate to find the total interest rate. For instance, if a floater is tied to LIBOR plus 2% and LIBOR is 12% when the interest payment is due, then to interest rate for that payment is 14%.
3. Find the interest payment.
Multiply the value of the bond by the interest rate to find the interest payment for that payment cycle. Note that you will need to repeat the process every time an interest payment is due as the payment will always be determined by the current value of the fluctuating rate tied to the floater.
Some floaters have floor and ceiling values that interest payments cannot dip below or exceed. Take these into account whenever there is a large fluctuation in that rate tied to the floater.
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