Let say, I have some
floating rate bond where the coupon depends on
6-month Libor with semi-annual payments.
In a typical text-book, the way this bond is priced (dirty-price) is that, replace
expected future Libor rate as
Forward 6-month Libor rates and then discount those cash-flows with
Libor rate again, using same Libor term-structure as seen today.
I feel this makes sense based on the
Now let say, this Bond is
Corporate bond. In this case, how does it make sense to discount it using
Libor? Should not we use different
term-structure of Yield based on the
Credit-Rating? But in that case, how to mathematical basis of using
T-forward measure would still hold?
Or, we should still use the
Libor as discounting and then make
Credit-value adjustment after I get the risk-free pricing using Libor? In that case, how should I calculate the
Credit-value adjustment for this case?
Really appreciate for any help to understand the mathematical basis for risky floating rate bond pricing.