A GENERALIZED-APPROACH TO PRICE AND DURATION OF NON-PAR FLOATING-RATENOTES

Floating-rate notes trading at a discount have seemingly counter-intui tive price sensitivities to interest rate movements. Further, the pric e responses to changes in the risk-free rate differ from the responses to credit spread movements. When collateral is provided for the final cash now - as it is for many Brady bonds - the divergence occurs even if the note trades at par. Interestingly, the collateral may work to reduce the divergence when the note trades away from par. With the pro liferation of developing country debt instruments, traders and investo rs need a consistent methodology for these price and sensitivity measu res. The author provides such a methodology in this article. Creation of a ''companion'' fixed-rate bond for each neater makes calculation o f the required measures straightforward. And by properly defining dura tion in the presence of collateral, the resulting sensitivity measures become parallel to those measures already familiar to market particip ants.