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Question about Interest Rate Swap valuation (Floating Rate Side)

Hi guys,

The value of a fixed-for-floating interest rate swap is PV(fixed) - PV(floating) or the other way around, but I didn’t quite understand the calculation for PV(floating) part.

So if we are valuing such a 1-year swap with quarterly payments at 30-day for example, PV of floating rate bond is calculated as First Payment at 90-day + Bond Par Value, and then discounted to 30-day. Schweser showed that a floating-rate bond will always be worth its par value at every settlement date, but I still don’t really understand why we don’t need to consider the CFs at 180-, 270-, and 360-day? It looks just like the final payment of a fixed rate bond.

Can someone also remind me where is the relevant chapter for floating rate bond valuation in the readings?


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When the coupon rate equals the YTM, a bond sells at par.

For the formula you’re discussing, the coupon rate resets to the YTM (the reference rate) at each reset date, so at each reset date the value of the bond is par.

If the coupon resets to something other than the reference rate (e.g., ref. rate + 200bp), then the price of the floating leg doesn’t reset to par.  But there’s an easy way to handle that situation.

I wrote an article on valuing plain vanilla interest rate swaps here:

(Full disclosure: as of 4/25/16 there is a charge to read the articles on my website.  You can get an idea of the quality of the articles by looking at the free samples here:  Note that for the time being there’s a 33% discount on the subscription price.)

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams

Thanks, but can you post your article on the IRS here as a free sample? (Can’t get an idea of the quality of the article unless it is on the topic that you have questions about, does that make sense?) Greatly appreciated!