Fin 515

Fin 515 Week 3 Discussion Part1

A floating-rate bond is a bond whose coupon payment may vary over time. The coupon rate is usually linked to the rate on some other security. The floating-rate debt is popular with investors who are worried about the risk of raising interest rates, since the interest paid on such bonds increases whenever market rates rise. This causes the market value of the debt to be stabilized, and it also provides institutional buyers, such as banks, with income that is better geared to their own obligations. Floating-rate appeals to corporations that want to issue long-term debt without committing themselves to paying a historically high interest rate for the entire life of the loan (P. 176 & 177). A floating-rate does not have a fixed rate of interest over the life of the debt.

An example, it is determined that the value of a single unit of local currency is equal to USD 3.00, the central bank will have to ensure that it can supply the market with those dollars. In order to maintain the rate, the central bank must keep a high level of foreign reserves. This is a reserved amount of foreign currency held by the central bank which it can use to release (or absorb) extra funds into (or out of) the market. This ensures an appropriate money supply, appropriate fluctuations in the market (inflation/deflation), and ultimately, the exchange rate. The central bank can also adjust the official exchange rate when necessary.

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Bond valuation is a process or strategy that is used to identify the fair market value of a given bond issue.

The variables for bond valuation are

Par Value is the stated face value of the bond. This is fixed by contract because it is mentioned in the contract.

Coupon Interest Rate is the annual coupon payment divided by the face value of the bond. This is fixed because it is the...