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
Following are the areas an analyst should consider while assessing the creditworthiness of an issuer. 1. Security Limitations: The bond indenture shoul

What is the annual tax shield to a firm that has total assets of $80 million and a net worth of $55 million, if the average interest rate on debt is 8.5% and the marginal tax rate

The standard cost of chemical mixture ~ PQ’ is as follows: 40% of material P @ Rs. 400 per kg. 60% of material Q @ Rs. 600 per kg. A standard loss of 10% is normally anticipated in

What is the most conservative type of working capital financing plan a company could implement?  Explain. An all equity capital structure would be mainly conservative type of wor

How is the finance company play a vital role in investment intermediaries? Finance companies: Finance companies make loans to corporations and individuals by giving consu

QUASI-INSTRUMENTS These instruments are considered as debt instruments for a time-frame and are converted into equity at the option of the investor (or at company's option) aft

Q. Show the Supposition of MM Hypothesis? Supposition of MM Hypothesis:- (i) There are ideal capital markets. (ii) Investors act rationally. (iii) Information regardin


In two of the four months of the cash budget Thorne Co has a cash shortage with the highest cash deficit being the opening balance of $40000. This cash shortage which has occurred

Q. What do you mean by Present Value of a Future Sum? The present value of a future sum will be worth less than the future sum because one foregoes the opportunity to invest an