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

Types of investment strategy of hedge funds, Various Types of Strategies ...

Various Types of Strategies Different types of hedge fund strategies are discussed as follows: Relative Value of Strategies: Relative value strategies are also known as no

Factors affecting composition of working capital, I need a report on the to...

I need a report on the topic Factors affecting Composition of Working Capital. Can you please assist me?

Dual-indexed floaters, In dual indexed floaters the coupon rate is a ...

In dual indexed floaters the coupon rate is a fixed rate plus the difference between two reference rates. Purchasers of these securities typically make an assumpt

Valuation models, V aluation Models A valuation model defines the e...

V aluation Models A valuation model defines the exercise of applying financial and economic principles to estimate the value of an asset. Discounted cash flow valuation mod

Short terms working capital, Q. Short terms working capital? 1) Indige...

Q. Short terms working capital? 1) Indigenous bankers: private money leased and other country banking used to be the only source of finance prior to the establishment of the

Advantages and disadvantages of aggressive working capital, What are the ad...

What are the advantages and disadvantages of the aggressive working capital financing approach? An belligerent working capital financing approach typically results in a lower c

Define insurance company that takes on the greater risks, Which type of ins...

Which type of insurance company generally takes on the greater risks: a life insurance company or a property and casualty insurance company? The risks protected in opposition to

Core Concepts, Do you have Textbook solutions for Financial Management Core...

Do you have Textbook solutions for Financial Management Core Concepts Author: Raymond M. Brooks. ISBN 978-0-13-267103-3.

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