A firm issues a floater with 100 face value paying LIBOR every six months, two repricing and coupon payment dates are Jan 1 and July 1 each year. The floater will mature on Jan 1, 2044. Assume the yield curve is always flat. The floater was rated as AAA and has a similar credit quality as the LIBOR. 

a. On Jan 1, 2019, the effective annual interest rate was 7%. The floater can be decomposed into a zero coupon bond and a floating rate annuity. 

i. Find the price of the floater, the zero-coupon bond, and the annuity

ii. Find the duration and modified duration of the floater, the zero-coupon bond, and the annuity 

b. On March 1, 2019, the effective annual interest rate became 5%. The floater can be  regarded as a zero-coupon bond 

Find the time-to-maturity and face value of such zero coupon bond?

Find the price of the floater on March 1, 2019. Is it a premium or discount bond?

Find the approximate duration of the floater on March 1, 2019. 

Answer rating: 100% (QA)

a i To find the price of the floater we need to find the present value of its cash flows The cash flows are based on LIBOR which is unknown so we cannot calculate the exact price However we can make a... View the full answer