How to use the floating rate bond calculator
The calculator starts with a 3-year note paying the reference rate plus 120 bp every quarter, valued at a discount margin of 150 bp.
- Face value and quoted margin. The quoted margin is in the bond’s terms, for example “SOFR + 120 bp”. Enter it in basis points; 100 bp is one percentage point.
- Reset frequency and years to maturity. Most floaters reset and pay quarterly; each coupon period is one reset.
- Reference rate. Choose one constant rate, or paste an expected rate for each period. The first value is the rate already fixed for the current period. The example path is illustrative: it starts at 4.30% and drifts lower. Market forward rates are a common source for a path; if the list is shorter than the bond, the last rate repeats.
- Discount margin. The spread over the reference rate the market requires today, from a dealer quote or the spread on similar new issues.
The results show the price, the next coupon, the total of projected coupons and how much the price would move if rates or the discount margin changed. The chart and the schedule list every projected coupon with its present value.
How coupons and the price are calculated
Each coupon is set from the reference rate at the start of its period:
The price discounts each cash flow at the reference rate plus the discount margin, period by period:
Price = Σ Couponk × DFk + Face × DFnDM is the discount margin and n the number of periods. When DM equals QM, the price is exactly the face value for any rate path.
The rate sensitivity keeps the first coupon fixed, since it has already been set, and raises every later reference rate and every discount rate by one point.
A worked example
A $1,000 note pays the reference rate plus 120 bp each quarter for 3 years. With the example path, the next coupon is $13.75 and the 12 coupons add up to $149.88, an average coupon rate of 5.00%.
The market requires a discount margin of 150 bp, more than the bond pays, so it is worth $991.74: 99.17% of face.
If every future reference rate rose by one point, the price would change by only -$2.33 (-0.23%). A fixed-rate bond of the same maturity would change by -2.73%. But if the discount margin widened by 50 bp, the price would change by -$13.59 (-1.37%).
Why a floater stays close to par
At each reset, the coupon moves to the current reference rate plus the quoted margin. If the market’s required margin has not changed, the bond again pays exactly what the market wants, so its value returns to par. Between resets, only the coupon already fixed is out of date, which is why interest rate duration is roughly the time to the next reset: about a quarter of a year for a quarterly floater.
The price moves away from par for a different reason: a change in the margin investors demand for the issuer’s credit risk. That gap between the discount margin and the quoted margin works like a fixed-rate bond’s coupon against its yield, and its effect lasts until maturity:
| Case | Price | Change if rates rise 1 point | Change if the margin widens 50 bp |
|---|---|---|---|
| Discount margin 120 bp (= quoted margin) | $1,000.00 | -0.25% | -1.37% |
| Discount margin 90 bp | $1,008.34 | -0.26% | -1.37% |
| Discount margin 150 bp | $991.74 | -0.23% | -1.37% |
| 10 years, constant rate, margin 150 bp | $977.36 | -0.15% | -3.72% |
Longer maturity barely changes the interest rate exposure but greatly increases the credit spread exposure. A floater swaps rate risk for income uncertainty, and keeps the credit risk.
Caps, floors and other features
- Caps limit the coupon to a maximum rate. When rates rise above the cap, the bond behaves like a fixed-rate bond and its price falls with rising rates. A cap is an option the investor has sold to the issuer, and it is paid for with a higher margin.
- Floors set a minimum coupon, protecting income when rates fall. A floor is an option the investor owns, so floored notes usually carry a lower margin.
- Collars combine a cap and a floor. Pricing any of these needs an option model with rate volatility, which this calculator does not include.
- Lookbacks and lockouts. SOFR-based notes typically compound the daily rate over the period and fix it a few days before payment, so the exact coupon is known only shortly before it is paid.
What this calculator does not include
- Day counts. Each period accrues exactly 1/f of the annual rate. Most US floaters accrue on an actual/360 basis, so real coupons differ slightly from period to period.
- Accrued interest and valuation between reset dates. The bond is valued on a reset date.
- Option features such as caps, floors and calls.
- Credit events. The schedule assumes every coupon and the face value are paid in full. The credit spread calculator shows how to read a spread as default risk.
For fixed-rate bonds, use the bond price calculator and the bond duration calculator to compare interest rate sensitivity.