Valuing a Capped Floater w/ Binomial Tree?

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a13firman

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I just got thrown for a loop on this. In the Wiley Mock Exam one of the questions asks you to Value a Capped Floater with a binomial tree. I hadn’t seen this in any of the Schweser notes. and combing through the LOSes for Reading 45 I can’t find a place where they could put this. It IS in the CFAI books but nowhere to be found in the Schweser books.
Is this something you guys are spending time on? I know the default response is to say that if it’s in the CFAI books you need to know it, but which LOS would this fall under? Hopefully I’m not missing something obvious.
 
Should I know how to do it from the tree? LOS 45.c is the only calculate LOS but it specifies Putable and Callable only. So from my standpoint (even though CFAI probably doesn’t care about that) it wouldn’t encompass a Capped Floater, right? The only LOS in 45 that deals with embedded options in terms of the arbitrage-free framework is 45.c but it just says describe and not calculate.
 
Although there is an entire section of reading 45 dedicated to floating-rate bonds (section 5), it appears that there are no LOSs that address floating-rate bonds explicitly.
That’s weird.
I’d be prepared for it, nonetheless. Fortuntely, it isn’t difficult.
 
I wrote an article on valuing floating-rate bonds using binomial trees, including those with caps and those with floors: http://www.financialexamhelp123.com/valuing-floating-rate-bonds/
Full disclosure: as of 4/25 I’ve installed the subscription software on my website, so there’s a charge for viewing the articles.
In a nutshell, the coupon payment that you get at any node will depend on the rate at the preceding node. If that coupon payment is greater than the cap, you replace it with the cap payment; if the coupon payment is less than the floor, you replace it with the floor payment. Start at the right and work your way left, averaging, discounting, and adding the coupon payment.
 
The Los doesn’t even have a single word on floater caps and floors. I’ve done all the EOC questions and haven’t seen a single calculation on this. Should we really learn how to calculate this?
 
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