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Pricing a Floating Rate Loan

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A Floating Rate loan is a rate type where the interest rate can reset monthly, weekly or at any time during the month. This is not a loan that would have a fixed rate for some period in excess of a month. The rate type selection should be “Floating” if the rate resets within a 30/31 day time period at anytime during the life of the loan due to changes in the market or a custom defined index. This is often associated with Prime based loans, but one or three month Libor are becoming popular indices. 

Floating rate opportunity

 

When this type is selected, additional entries must be made above those required for a fixed rate loan. These are:

  • The index that will be used at the time of adjustment.
    • There are up to six families of indices that can be selected. The custom Index is usually only shown if the institution uses an internal index that is put into PrecisionLender.  The institution’s model administrator can also choose to eliminate other families of indices.  PrecisionLender will default to the family set by the institution.
  • The maturity of that index that will be used.
    • Once the family is chosen, PrecisionLender will show the index with a one-month maturity. If an index only has one maturity, just one selection is available, as with the “Prime” family for example. If an index has multiple maturities, for example Libor, the user can switch to that index.
  • The spread to the index at time of adjustment.
    • This is usually some positive amount, although when Prime is the index it may be occasionally negative. PrecisionLender will recommend a spread that will meet the target. A cap and/or floor can also be chosen.

 

The Initial Rate section will display the initial rate to the borrower as a result of the index, spread, and cap and/or floor (if applied).

 

 

 

 

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