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
How could we project exchange rates in order to be able to forecast exchange differences? If someone knew how to predict exchange rates, they would be a millionaire and would n

Assume that an investor invests $X in a 3-year zero coupon Treasury security. Three years from now, the total return received would be:

Variance Analysis: In its commonest form variance analysis is the process of comparing budgeted financial performance (or financial goals) against actual financial performance.

State the concept of Overtrading Overtrading can result in insolvency which means companies have severe cash flow problems. This means that a thriving company, which may look v

a) Year 2 ROCE = $400k / $1,000k = 40% Year 1 ROCE = $360k / $800k = 45% b) ROCE is an efficiency ratio that measures the monetary performance of a firm compared with the amo

These are bonds which are offered within the euro market and several other markets simultaneously. Unlike Eurobonds, global bonds can be issued in the same curren

Optimal Cash Model: Cash Management is a bigger aspect that involves range of functions that assist individuals and business to process their payments and receipts in an organ

Limitation of profit maximisation -Quality of Benefits Probably the most vital technical limitation of profit maximisation as an operational objective, is that it ignores qua

explain the concept of working capital management?

Question 1 ) A Globalization is a procedure of international integration that arises due to increasing human connectivity as well as the interchange of products, ideas and other ph