Advantages of floating rate notes, Financial Management

Advantages of Floating rate notes:

We know that the coupon rate is fixed for fixed rate bonds and that throughout its tenure the investor receives coupons at a predetermined interest rate irrespective of the changes in the interest rates in the market. Further, bonds experience inverse price changes when the market rates of interest change. That is, the price of a bond decreases when there is an increase in the market rates and increases when there is a decrease in the market rates. It has been observed that FRNs will experience only mild price changes between reset dates, the reason being that the reference rate normally moves in tandem with the market rates and the coupon of the FRN is pegged to the reference rate.

It is to be appreciated that FRNs make attractive investment for the investors with a strong need to preserve the principal value of the investment if they desire to withdraw the investment prior to the maturity date of the bond. The reason is very simple; the rate of interest paid as coupon rate is almost the same as the market rate at any given point of time.

FRNs are equally advantageous to the issuers because they need not borrow long-term debt at historically high rates of interest particularly when there is a declining trend in the interest rates. During 1993, MRPL issued partly convertible debentures at 16.5% rate and had to keep on paying interest on the debt portion at the same rate even after five or six years when the market rate of interest had considerably come down. Similarly, the Hyderabad Urban Development Authority (HUDA) also issued bonds at 15% interest whereas the market rate subsequently came down drastically. HUDA is still paying interest at 15% to fulfill its original commitment.


Posted Date: 9/10/2012 8:27:56 AM | Location : United States

Related Discussions:- Advantages of floating rate notes, Assignment Help, Ask Question on Advantages of floating rate notes, Get Answer, Expert's Help, Advantages of floating rate notes Discussions

Write discussion on Advantages of floating rate notes
Your posts are moderated
Related Questions
Your family purchased a house three years ago. When you bought the house you financed it with a $160,000 mortgage with an 8.5% nominal interest rate (compounded monthly). The mortg

Are there any legal factors that could restrict a corporation in its attempt to pay cash dividends to common stockholders?  Explain. A firm may be lawfully restricted as to the

Q. Give subject matter of participation? Subject matter of participation by and large the workers interests in participation varies with the nature of issues' involved in parti

Ashok is to receive an amount of Rs. 15,00,000 from his relative after 3 years. He wants to buy a house for which he wants the money to be paid now. His relative had al

The management of Nelson plc wish to estimate their firm’s equity beta. Nelson has had a stock market quotation for only two months and the financial management feels that it would

Bridge Financing A type of short-term financing used to cover an organization short-term want; a loan that is expected to be repaid relatively fast.

How to use integrated promotional mix to achieve marketing objectives

Sovereign debt is a debt instrument guaranteed by the government. The other names for sovereign debts are sovereign bonds or government bonds. They are issued in

Reference Index Every FRN chooses its own reference index upon which the calculation of each successive new coupon is based. The most commonly used reference index is LIBOR. It

What is Sinking Fund A provision which requires the corporation to set aside a fixed amount every year to help provide for orderly repayment of the debt issue.