The main difference between the "short-form" and "forward" methods of pricing a floating-rate note is:
A)The short-form method gives lower prices than the forward method.
B)The short-form method gives higher prices than the forward method.
C)The short-form method does not require knowledge of the entire forward term structure of interest rates.
D)The short-form method does not use the entire forward term structure of interest rates and hence results in less accurate prices.

Question

Quizplus · Accepted Answer

Both methods result in the same price for a floating-rate note,but the short-form approach does not need more than the first period's discount rate,since the remaining cash flows are at floating and are at par.The forward method uses the entire forward curve to extrapolate all future cash flows that are then discounted to obtain the present value of the FRN.But since the future cash flows are extrapolated and discounted off the same forward curve,they are at par-recognizing this fact,the short-form approach only discounts the first fixed cashflow plus the par value of the FRN.

The Main Difference Between the "Short-Form" and "Forward" Methods of Pricing