In finance, a range accrual is a type of derivative product very popular among structured-note investors. It is estimated that more than US$160 billion of Range Accrual indexed on interest rates only have been sold to investors between 2004 and 2007. It is one of the most popular non-vanilla financial derivatives. In essence the investor in a range accrual is betting that the reference “index” – usually interest rates or currency exchange rates – will stay within a predefined range.
What is ‘Range Accrual’
A form of interest accrual in which the coupon rate is only earned on days when another rate from which the coupon is derived falls within a specified range. As such, there is no standard coupon rate that can be counted on for interest payments.
Explaining ‘Range Accrual’
Range accrual notes are complex instruments that are valued and adjusted in a similar manner to American style options. They are typically used by large institutions as a hedge of another position. No official market exists for range accrual notes trading or valuation.
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