I’m going through Wiley mock 1, and in the FI section, it asks to calculate the value of a floating rate bond with the coupong based on 12 month LIBOR + 320 bps, but it does not give the LIBOR rate. It gives the cap rate as 5.4% and gives the corresponding interest rates in the tree. Are we expected to find the LIBOR rate or am i missing an easy calculation?

I wonder if this is errata. Let’s say Libor was 0%… The floating rate coupon would be $3.2 (coupon is 12-month Libor + 320 bps). In the answer some of the values on the tree discount to less than par (less than $100) even though the discount rate is less than 3.2%. I can’t believe how much time I’ve wasted on this question.

I normally don’t post questions and try to figure out answers on my own, but this one really has me stuck.

I figured it out. The question is based on a blue box in the text (p 358-360) related to capped floaters. Basically the rates given are the LIBOR and you add 3.2% to that. You use that rate as both the discount and coupon and you should get the answer of 99.856. Obviously, if the coupon rate surpasses 5.4% you would cap it at that, but discount at the LIBOR + 320 bps rate.

I don’t understand the concepts of the second question. I’ve read it over a few times and i just dont care anymore. I thought curvature would be involved at some point.

Edit: get the second question and its right. Explanation in the answers misstates that the LT rate declines as well. By process of elimination, since there is no curvature, A is the right answer.