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Fixed vs Floating Rate Instruments [Video]

Fixed vs Floating Rate Instruments

A fixed-rate instrument has an interest rate that is set at the contract inception and remains constant throughout the life of the instrument.
• The value of a fixed-rate instrument is the present value of its expected cash flows
• Most residential mortgages are fixed-rate instruments

A floating-rate instrument has an interest rate that changes throughout the life of the instrument.
• The rate is usually tied to an index, such as the 1-month LIBOR.
• The “reset date” or “rate fixing date” is when the new rate is determined for calculating future interest (a floating-rate instrument that resets quarterly would thus have a new interest rate every 3 months)
• Many commercial loans, credit cards, and home equity lines of credit are floating-rate instruments

Valuing a floating-rate instrument can be difficult because the amount of all future cash flows is not known at inception. One way to value the instrument is to predict what future interest rates will be at the reset dates (either by calculating implied forward rates or using a forecasting model) and then discount the expected cash flows as you would do with a fixed-rate instrument.

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Resources for Accountants

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Resources for Accountants

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Resources for Accountants

Application of ASC 805 [Video]

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Resources for Accountants

Advanced Issues and Disclosures [Video]

This is the introductory video to our self-study eLearning course "Business Combinations: Advanced Issues and Disclosures." Check it out here: https://www.gaapdynamics.com/product/business-combinations-advanced-issues-and-disclosures/ This is the second course of the three-part Business Combinations eLearning series. Now that you are familiar with the basic accounting rules, this course dives deeper into more advanced business combination issues such as exceptions to general guidelines, noncontrolling interests, and measurement period adjustments. Learn more about GAAP Dynamics: https://www.gaapdynamics.com/ Check out our other online courses on the GAAP Dynamics Learning Library: https://www.gaapdynamics.com/individual-learning/ Subscribe to GAAP Dynamics to see more videos like these!