Floating-rate bonds, Financial Management

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)            

Posted Date: 9/8/2012 5:14:37 AM | Location : United States

Related Discussions:- Floating-rate bonds, Assignment Help, Ask Question on Floating-rate bonds, Get Answer, Expert's Help, Floating-rate bonds Discussions

Write discussion on Floating-rate bonds
Your posts are moderated
Related Questions
Q. Illustrate the Operating Leverage? Operating Leverage: - The operating leverage perhaps defined as the tendency of the operating profit to differ disproportional with sales.

What are the factors of debt securities A legal agreement, known as a trust deed, is drawn between security holders and company issuing the debt securities. Every security issu

#what are the main points in scope or contents of financial functions#

Market based Ratio's   PE:           The Price-to-Earnings ratio is calculated by market price per share to earnings per share and is expressed in terms of times. It shows h

QUESTION An audit team is currently engaged in planning the audit of the financial statements of E Limited as at 30 June 2007. This was the first accounting period during which

how would you judge the potential profit of bajaj electronics on the first year of sales to booth plastics and give your views to increase the profit ?

Goral is required to pay five equal annual payments of Rs. 10,000 each in his deposit account that pays 10% interest per year. Find out the future value of annuity at the end of fi

Yield to put is the rate at which the present value of cash flow to the first put date is equal to the price plus interest rate. It is used for

Q. Explain a variety of factors determining Dividend Policy? Dividend: - Dividend demotes to that part of net profits of a company which is distributed between shareholders as

Peak Inc. needs to order Canadian raw materials to use in its production process. The Canadian exporter typically invoices Peak in Canadian dollars. Assume that the current exchang