Approximating Floating-Rate Note Value with a Comparable Discount Margin

Summary

The note evaluates a proposed shortcut for revaluing a floating-rate note: adjust par by the difference between its quoted margin and a comparable instrument’s discount margin, scaled by notional. One response considers the approach plausible when the two floating-rate notes have comparable terms and attributes, and raises issuance timing as a relevant comparability question.

A second response frames the shortcut as an approximation because the FRN and the proxy bond may trade with different supply-demand conditions, creating a basis that changes over time. Maturity mismatch can add a tenor basis, and using a basket as a proxy can add further differences. The discussion provides no pricing formula, market observations, or validation results, so it does not establish the size or stability of these effects. The estimate is most defensible when the instruments are closely matched and should be treated cautiously when their maturities, structures, or market bases diverge.

Key ideas

• A comparable floating-rate note’s discount margin may serve as a rough valuation reference.
• Similarity of instrument terms and attributes is central to the approximation.
• Different products can have a basis driven by their distinct supply and demand conditions.
• Maturity mismatch and basket proxies can introduce additional valuation basis effects.
• The note offers no empirical validation, so the approximation’s accuracy is unknown.

Tags

# Floating rate note value approximation


# Floating rate note value approximation












I was hoping somebody can assist me with a query. Would it be a valid approach to revalue a frn with a discount margin from a comparable bond as par minus the difference between the quoted margin and comparable margin multiplied by the notional?

Thanks

## Answer by user29470 (score 1)

https://quant.stackexchange.com/a/36009

I don't see any issue with it as long as the terms and attributes of the two FRNs are comparable. Were the two FRNs issued on the same date?

## Answer by Magic is in the chain (score 1)

https://quant.stackexchange.com/a/42109

Reading your question and the comment, it could at at best be an approximation. There is a basis between the FRN and the bond because they are different products and subject to different supply and demand conditions. The basis would vary over time. If the maturities are not aligned then there would be another basis (e.g., tenor basis). The basket proxy would introduce yet another basis.

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