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 is a European market rate, used when European banks negotiate loan agreements. The British Banks Association which has a consortium of 24 British banks publishes it. Other reference indices are US 90-day Treasury Bill rates, Prime rates, Commercial Paper rates, etc. In India, MIBOR (Mumbai Inter-bank Offer Rate), 10-year Government Bond rate, 3-year Fixed Deposit rate of State Bank of India, etc., are some of the reference indices.

Quoted Margin to Reference Rate

This is also called default risk premium. This indicates the additional rate paid over and above the reference rate. It is the compensation for the credit risk of the issuer. The spread over the indexed rate could be fixed or varying. This spread depends mainly on the security offered by the issuer and his creditworthiness. Companies which claim good reputation in the market like Reliance and Tata would be able to issue FRNs with very thin premium.

Reset Frequency

Normally periodicity of coupon payments and the reset dates go together. That is, they are identical. However, on some FRNs, the coupon resets faster than it pays. For example, the coupon rate might be reset monthly but the coupon interest might be paid quarterly. In such cases, the interest payable on the bond will be revised three times between two consecutive interest payments if the reference rate undergoes change in all the three months.

Observation Date

The rules for determining the dates upon which the value of the reference index is observed for the purpose of setting the next coupon change from one issue to the other. The rule for specifying the observation date generally includes not only a specific time, but also a specific place. To quote an example, the observation date for three month LIBOR might be specified as the average offered rate for three month Eurodollar deposits at a list of reference banks in London at 12 Noon on the second business day preceding the reset date.

Maturity Date

This is simply the due date of the bond on which the principal of the bond and the last coupon payment become payable.

 

Posted Date: 9/10/2012 8:24:18 AM | Location : United States

Ask an Expert

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

Write discussion on Important features floating rate notes
Your posts are moderated

Write your message here..

Related Questions

What are the benefits of traditional approach, What are the benefits of Tra... What are the benefits of Traditional approach Traditional approach had a very narrow perception and was devoid of an integrated conceptual and analytical framework. It had pre

Financial management, Financial Management: Financial management is, in... Financial Management: Financial management is, in its most basic interpretation, the management of costs against revenue. Other management initiatives, such as marketing, are d

Risk and return of portfolio, Portfolios are simply combinations of differe... Portfolios are simply combinations of different securities. The characteristics of investments do differ when we possess them in combinations or portfolios. As we shall see, an ass

Special bond structures, Special bond structures are the municipal se... Special bond structures are the municipal securities bearing special security structures. They are of two types - insured bonds and pre-refunded bonds.

Bond market innovations, As liberalization is gathering momentum, cor... As liberalization is gathering momentum, corporate treasures and merchant bankers are in the process of devising new products to suit the needs of investors and c

What are implications of ownership rights by equity claims, What are the ma... What are the main implications of ownership rights by equity claims? Ownership rights have two primary implications: a. First, equity holders can advantage by any raise in t

Problems arising due to the existing structure, Problems Arising Due to the... Problems Arising Due to the Existing Structure The problems that arise as a result of an increase in the population of older generation is universal in nature. Unless there are

Find out the price of equity shares., Following details are related to thre... Following details are related to three companies which are identical except in terms of ''r''. Company ABC Ltd. MNC Ltd. XYZ Ltd. Cost of capital 10% 10% 10% Earn per

Consigner for safe transportation of dangerous goods, Q. Consigner for safe... Q. Consigner for safe transportation of dangerous goods? It is the responsibility of the consigner to ensure the following, 1. The goods carriage should have a valid registr

Calculate debt or equity ratio, Calculate Debt or Equity Ratio XYZ LI... Calculate Debt or Equity Ratio XYZ LIMITED Key data related to XYZ for last three years is as follows:   2011/12 2010/12