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I am trying to understand how YTM's are calculated for floating rate notes. I have had a go at calculating it and I am always a few bps off for every FRN I try to calculate. Does anyone have any ideas as to what I could be doing wrong?

*I am looking at a run sheet that I get from my advisory network.

Last price $101.25 Quoted margin 0.89% + 2.8% = 3.69% Quarterly payments

PMT = 3.69/4 = 0.9225 FV = 100 PV = -101.21 n = 4

I get the answer 2.16%

But the run sheet says 2.38%. What would I be missing?

Many thanks

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  • $\begingroup$ Thanks for the edit. What is the maturity of this FRN? 1 Year? $\endgroup$ – noob2 Feb 19 '20 at 14:49
  • $\begingroup$ 15th Dec 2020 is the maturity date $\endgroup$ – NewInvestor Feb 19 '20 at 22:21
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The yield is the internal rate of return of the coupons and the principal repayment. For a floater, the future unset coupons are not known, and the value of the yield depends a lot on how you project them, making the yield less stable than DM.

On Bloomberg terminal, for example, there is a setting for how to project a floater's coupons. The default is to use the same index value. The non-default behavior is to use the swap curve to project the libor rate on future coupon dates.

I suggest you separate the project of matching other people's yields into two parts.

First, see if you can get their projected coupons, and see whether you match those or understand why they don't match (could well be due to different market data).

Second, check that if you plug their cash flows into your IRR calculation, you get the same answer as them - aren't missing some obscure conventions.

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