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

Exchange rate uncertainty affect firm exchange risk exposure, The exchange ...

The exchange rate uncertainty may not essentially mean that firms face exchange risk exposure. Describe why this may be the case. Answer:  A firm can comprise a natural hedging p

State the example to calculate the present value, State the Example to calc...

State the Example to calculate the present value 2, 00,000 $ is the amount which you require after 20 years for your retirement. How much must you invest now at 5% per annum co

Evaluate the annual premium under this policy, Question: A 10-year defe...

Question: A 10-year deferred life assurance policy with variable benefits is issued to a select life aged 36. The policy provides the following benefits:- Sum assured is

Explain the structure of financial systems, Explain the structure of financ...

Explain the structure of financial systems In direct finance borrower-spenders borrow funds straight from lenders in the financial markets by selling them securities. In indire

Credit enhancement mechanisms, Credit enhancement is a key part...

Credit enhancement is a key part of the securitization transaction in structured finance, and is important for credit rating agencies. Credit enhancem

Walters and gordon model, Following are the details relating to three compa...

Following are the details relating to three companies which are identical in terms of ''r'' ABC ltd MNC ltd XYZ ltd Cost of capital

Benefits of conducting a cost and benefit analysis, Question 1: i) What...

Question 1: i) What is meant by Cost and Benefit Analysis? Illustrate your answer with the use of empirical and hypothetical examples. ii) What are the benefits of conductin

Case let 1, which type of approaching to each firm

which type of approaching to each firm

Case study - danish mortgage bonds, (a) The subsequent is a discussion base...

(a) The subsequent is a discussion based upon IFR Special Report in issue 1239 during the Year 1998. Danish mortgage bonds have extended been domestic investors' referred d

Which is lower for company cost of debt or cost of quality, Which is lower ...

Which is lower for a given company:  the cost of debt or the cost of equity?  Explain.  Ignore taxes in your answer. The cost of debt is all the time less than the cost of equi

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