FRN Calculations

Investment returns on bonds are made up of interest rate returns and credit risk returns. A floating rate note (FRN) is a debt instrument that pays a floating rate of interest so the element of return due to interest rate risk varies in line with the market. Therefore the important thing for FRNs is the credit risk returns. Here we cover the calculation of an FRN, how the neutral price is arrived at and the adjustment of the neutral price to incorporate the cost of carry.