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

Explain the procedure for cost benefit analysis, Question 1: i) Pe...

Question 1: i) Performance budgeting is the best budgeting system. Discuss. ii) Why there is a need for implementing MTEF in the Mauritian Public Sector? Questi

Going concern in financial management, Going Concern in Financial Managemen...

Going Concern in Financial Management Going concern means in which business activities will continue for a fairly long period of time unless and until the business has entered

Minimax decision, How to compare minimax and maximin with figures and comme...

How to compare minimax and maximin with figures and commentary ?

Trouble in determination of cost of capital, Q. Trouble in Determination of...

Q. Trouble in Determination of Cost of Capital? Trouble in Determination of Cost of Capital:- 1. Historic Cost as well as Future Cost: - One main problem in the determinatio

Value of conversion benefits, Having seen the measure used for ...

Having seen the measure used for analyzing the convertible bonds, let us now examine the merits and demerits of convertible bonds, and why or wh

Find the minimum earnings, Milan Corporation is interested in buying a mach...

Milan Corporation is interested in buying a machine that will cost $50,000, and it will depreciate it on straight-line basis over a 5-year period. The machine is expected to last f

Explain foreign equity ownership restrictions, Explain foreign equity owner...

Explain foreign equity ownership restrictions. Why do you think countries entail these restrictions? Several countries restrict the maximum fractional ownership of local organiza

Strong form level of efficiency, Strong form level of Efficiency This l...

Strong form level of Efficiency This level states that price reflects all the available public and private information (past, present and future information). If the hypothesis

Importance of the government securities markets, Need to Widen and Deepen t...

Need to Widen and Deepen the Government Securities Market The importance of the Government Securities markets can be evaluated from three angles as follows: From the Gove

What are the coupon bonds security instruments, What are the coupon bonds s...

What are the coupon bonds security instruments? Coupon bonds are contractual agreements by the borrowers to make regular payments (known as coupons or interest) until a specifi

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