Already have an account? Get multiple benefits of using own account!
Login in your account..!
Remember me
Don't have an account? Create your account in less than a minutes,
Forgot password? how can I recover my password now!
Enter right registered email to receive password!
Floating Rate Notes (FRNs):
When interest rates are high and the general outlook is either stable or indicating the possibility of a downward trend in return, then an investor would obviously consider purchasing a long-term fixed rate bond. The rationale behind such a strategy is simply to secure the prevailing high returns and also to benefit from any appreciation of capital that may occur when the expected future scenario is of declining rates of interest. If the present rates of interest are discouragingly low and if interest rates are expected to increase in future, then the investor cannot choose to go for long-term or medium-term investments whose coupon rates are based on the prevailing lower interest rates. He naturally looks for instruments which would pay interest that varies with the trend prevailing in the future years. This need of the investor led to the innovation of Floating Rate Notes. From the point of view of issuers, it should be noted that there are no conditions attached to the use of funds and therefore, the borrowers are free to use them for their general corporate needs. However, since many of these issues are unsecured, sovereign borrowers in developing countries are required to obtain a state guarantee while corporate entities require a bank guarantee.
Definition and Mechanism
A Floating Rate Note (FRN) is a bond issued for medium to long-term, which pays coupons that are pegged to the level of a certain floating index, which is called reference index. Let us consider a five-year FRN with coupons referenced to the six-month LIBOR (London Inter-bank Offer Rate) paying coupon semi-annually and the default risk premium set at 0.125%. This implies that during the five-year tenure of the bond, the coupon interest paid will be varying according to the LIBOR. For example, if the LIBOR is 6.6% the next coupon payment on a $1000 FRN will be equal to 0.5 (0.066 + 0.00125) (1000) = $33,625. If, on the other hand, for the next reset date the six month LIBOR comes down to 5.7%, then the coupon payment will be equal to 0.5 (0.057 + 0.00125) (1000) = $29,125.
In a basic floating rate note, the following are the five important features:
Dividend cover Dividend cover = Profit available to ordinary shareholders (PAT) / Annual dividend(no. of times) Or = EPS/Dividend per share Dividend cover shows safety
Q. Describe the basic Career stages? The proper way to analyze and discuss career is to look at them as made up of stages. We can identify five career stages that people most p
A portfolio manager would never prefer to make investment decision based on just one set of assumptions. Instead, he would evaluate the outcome of the selected st
Insider Trading Insider trading refers to dealing in securities by persons who are privy to specific information of companies. This possession of confidential information gives
Q. Describes the Certainty Equivalent Coefficient Method? Introduction: - Certainty equivalent coefficient process which makes adjustment against risk in the estimates of futur
Select a business with which you are familiar and identify examples of customers using search, experience, and credence quality to evaluate the good or service
causes for financial innovation
1. Your welfare depends on how much time you travel T and how much time you play P and is the product of the two, i.e., W = T * P (a) The total amount of time you have is 10 ho
Can a company have a default rate on its accounts receivable that is too low? Explain. A company could comprise a default rate on AR that would be referred too low if by liberal
Define intermediation The financial system makes it probable for surplus and deficit economic units to come together, exchanging funds for securities, to their mutual advantage
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!
whatsapp: +1-415-670-9521
Phone: +1-415-670-9521
Email: [email protected]
All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd