Advantages of floating rate notes, Financial Management

Assignment Help:

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.

 


Related Discussions:- Advantages of floating rate notes

Considerations before a mbo, Considerations before a MBO An MBO is just...

Considerations before a MBO An MBO is just like any other take over and same consideration must be applied. (i)  Potential of the business. Is it worth buying? What does the

Define the replacement value of assets method, Why is the replacement value...

Why is the replacement value of assets method not usually used to value complete businesses? The replacement value of assets process is not often applied to complete business v

Forward rates, Now that we have seen how default-free theoretical rat...

Now that we have seen how default-free theoretical rate can be extrapolated from the treasury yield curve, let us see how some other additional information, like forwar

Explain basril plc, BASRIL PLC (a) (i) Analysis of projects assum...

BASRIL PLC (a) (i) Analysis of projects assume they are divisible. Project 2 NPV at 12% = (140800 × 3·605) - 450000 = $57584 Project 2 profitability index = 5

Cash flow estimation and risk ananlysis.., as a financial analyst, you must...

as a financial analyst, you must evaluate a proposed project to produce printer ink. the equipment would cost 60000 plus 10000 for installation. annual sales would be 5000 units at

Finance, #qSeven years ago, after 15 years in public accounting, Stanley Bo...

#qSeven years ago, after 15 years in public accounting, Stanley Booker, CPA, resigned his posiition as Manager of Cost Systems for Davis, Cohen, and O''''''''Brien Public Accountan

Financial portfolio of a company, A. Initial evaluation Comment on the...

A. Initial evaluation Comment on the structure of the attached portfolio, and on the financial risks facing Copper Based plc (CB), making use of what you know about how a port

PROFIT MAXIMIZATION, what are the arguments in favour of profit maximizat...

what are the arguments in favour of profit maximization?

What are the factors of debt securities, What are the factors of debt secur...

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

Call and refunding provisions, Call provision is the right of the iss...

Call provision is the right of the issuer to call back and retire the issued bonds before the maturity date. The issuer may call the bond and retire the bond by paying

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd