Floating-rate bonds, Financial Management

Assignment Help:

These were first issued during a period of extreme interest rate volatility in the late 1970s. Floating-rate bonds, which are also known as variable-rate bonds or simply floaters, are debt obligations with variable interest rates that are adjusted periodically (typically every one, six, or three months). The interest rate is usually fixed at a specified spread according to some reference rate, such as the MIBOR, LIBOR, 10 year benchmark paper etc., plus or minus a pre-specified quoted margin. The quoted margin is the additional amount that the issuer is ready to pay above the reference rate. It is often quoted in basis points (bps). The formula for the coupon rate is as follows: 

         Coupon rate = Reference rate + Quoted margin

For example, 3 month MIBOR rate is 8.50%. On the coupon reset date, the quoted margin is 150 basis points. Then the coupon rate will be:

         Coupon rate = 8.50% + 150 bps = 10.00%

The quoted margin need not be a positive value. The quoted margin may be deducted from the reference rate. For example, let us say that the reference rate is the yield of 10-years Treasury security and the coupon rate is reset every 3 months based on the formula:

         Coupon =10-years Treasury yield -50 basis points.

On the coupon-reset date, the 5-years Treasury yield is at 9%. Then the coupon rate is calculated as follows:

         Coupon rate = 9.00% - 0.5% = 9.5%

It is necessary to understand the procedure for the payment and setting of coupon rate. Let us consider a floater where interest is paid semi-annually. On the coupon reset date, interest rate is calculated based on a formula. This is the interest the issuer agrees to pay at the next coupon date six month from now. In simple words, the coupon rate is determined on the reset date, but paid in arrears.

Mumbai Interbank Offered Rate (MIBOR)  

London  Interbank Offered Rate (LIBOR)            


Related Discussions:- Floating-rate bonds

Weighted average, Saven Travel Corporation is considering several investmen...

Saven Travel Corporation is considering several investment opportunities in order to diversify its operations. Mr. Saven, president, is trying to determine the firm''s cost of capi

Compounding or future value concept, Compounding or Future Value Concept: -...

Compounding or Future Value Concept: - Under this process of compounding the future worth of all cash inflows at the end of the time horizon at a particular rate of interest are fo

Venture Capital, Difference between venture capital and conventional financ...

Difference between venture capital and conventional financing

Risks associated with investing in bonds, Interest rate risk is the risk wh...

Interest rate risk is the risk wherein the investor in bonds faces the risk of a fall in his bond price as and when there is a rise in the market interest r

Degree of uncertainty in predicting cash balances, Q. Degree of uncertainty...

Q. Degree of uncertainty in predicting cash balances? Probability approaches identify a degree of uncertainty in predicting cash balances and allow for a range of outcomes to

Please identify the largest potential threat, Using Southwest Airlines as a...

Using Southwest Airlines as an example, please identify the largest potential threat, the strategy employed, and what types of capital budgeting projects would be used to operation

Working capital management, what are the objectives of working capital mana...

what are the objectives of working capital management

Incremental cost, Incremental Cost The measured change in a firm's cos...

Incremental Cost The measured change in a firm's cost of production due to an additional activity pursued by the firm. Incremental costs can be measured by the cost difference

Explain the meaning of buy-ins, Explain the meaning of Buy-ins This  is...

Explain the meaning of Buy-ins This  is  when  third  party  management  team  make  a  takeover  bid  and  then  run  business themselves. Finance sources are same as to buy-o

Market-based versus bank-based financial systems, What do you meant by mark...

What do you meant by market-based and bank-based financial systems? Market-based versus bank-based financial systems implications. The presence of market-based and bank-base

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd