-60- Forecasted Present Value Net Cash Floating Net Cash Payment Fixed Payment Floating Payment Flow Discount Fixed Payment Payment Flow Dates (from FNBC) (to FNBC) (to FNBC) Factor (from FNBC) (to FNBC) (to FNBC) 6/1/1993 $25,278 $20,222 ($5,056) .9852 $24,903 $19,922 ($4,981) 12/1/1993 25,417 21,664 (3,753) .9643 24,509 20,890 (3,619) 6/1/1994 25,278 25,772 494 .9401 23,762 24,227 465 12/1/1994 25,417 29,549 4,132 .9131 23,207 26,980 3,773 6/1/1995 25,278 32,250 6,972 .8845 22,359 28,526 6,167 12/1/1995 25,417 35,180 9,763 .8545 21,718 30,061 8,343 Total —-- --- --- --- 140,458 150,606 10,148 2. Floating-Rate Note Method An alternative approach finesses the need to forecast expected cashflows. It works on the analogy between the swap and a pair of bonds, one of which has a fixed rate and the other of which has a floating rate. This method relies on the assumption of which the floating-rate bond is worth its face value on the effective date or on any reset date. Since the market value of the swap is equal to the difference between the value of the floating leg and the value of the fixed leg, and since the value of the floating leg is known, the problem is to determine the value of the fixed leg. This does not require the use of a forward curve. The floating-rate note method is useful when (1) the terms of the swap are plain vanilla and (2) the valuation date is a reset date. In other cases, a correct implementation of the floating-rate note method requires additional steps which are comparable to those employed in the forward rate pricing approach. The two approaches yield the same result in all events.Page: Previous 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 Next
Last modified: May 25, 2011