Question

1. If a floating-rate note has a cap, who can benefit from this feature (the cap)? If it has a floor, who can benefit from the floor? Explain
2. A floating-rate note with $1000 par value makes coupon payments quarterly. The coupon rate is determined by LIBOR plus 28 basis points. Calculate the coupon rates and coupon payment on the following date using the information available.

Answer 1

Q1
Issuer benefits from the cap when rates rise because he will pay a certain amount regardless of the increase in rates

Investor benefits from the floor when rates fall because he will receive a certain amount regardless of the decrease in rates

Q2
1.
Coupon rate=(1.64%+0.28%)=1.9200%

Coupon Payment=(1.64%+0.28%)/4*1000=4.80

2.
Coupon rate=(1.24%+0.28%)=1.5200%

Coupon Payment=(1.24%+0.28%)/4*1000=3.80

3.
Coupon rate=(1.40%+0.28%)=1.6800%

Coupon Payment=(1.40%+0.28%)/4*1000=4.20

4.
Coupon rate=(1.55%+0.28%)=1.8300%

Coupon Payment=(1.55%+0.28%)/4*1000=4.575