Collateralized Debt Obligations
Collateralized Debt Obligations (CDOs) are financial instruments issuing securities backed by diversified debt... Read More
Floating Rate Bonds
A floating rate bond is expressed as a reference rate plus a spread or margin. The spread is usually fixed, remains constant until maturity, and it is primarily a function of the issuer’s credit quality. The coupon rate adjusts to the level of market interest rates depending on the reference rate.
LIBOR
The London InterBank Offered Rate (LIBOR) is the reference rate for many floating bonds. For floating-rate bonds denominated in US dollars, the reference rate is the US dollar LIBOR and 3-month LIBOR if the coupons are paid quarterly. LIBOR rates reflect the rates at which multiple banks believe they could borrow unsecured funds from one another. Historically, LIBOR rates were set by the British Bankers’ Association (BBA).
The major advantage of the LIBOR is its prevalence of use. However, its main disadvantage is its dependence on the banks’ own estimates of their borrowing rates.
The interest on a floating-rate debt is calculated as the reference rate (usually the LIBOR) plus a spread. The spread is a function of the issuer’s credit quality. For example, a stable AAA-rated financial institution will have a spread of 0.5-2%, whereas a riskier issuer will have a higher spread.
Fixed Income Indexes
Fixed income indexes describe a given bond market or sector to measure and report performance. For example, Barclays’ Capital Global Aggregate Bond Index represents a broad global investment-grade fixed-rate bond market with 3 components: US, Pan-European, and Asian-Pacific Aggregate Bond Indexes.
Question
For a floating-rate bond, the coupon rate is the 3-month LIBOR plus a given spread. The coupon payments are likely to decrease if the:
- LIBOR decreases.
- Spread decreases.
- Company’s credit quality increases.
Solution
The correct answer is A.
The LIBOR is the only component that is subject to change.
Options B and C are incorrect. The spread is usually fixed and remains constant until maturity and is primarily a function of the issuer’s credit quality.
Sergio Torrico
2021-07-23
Excelente para el FRM 2
Escribo esta revisión en español para los hispanohablantes, soy de Bolivia, y utilicé
AnalystPrep para dudas y consultas sobre mi preparación para el FRM nivel 2 (lo tomé una sola vez y aprobé muy bien), siempre tuve un soporte claro, directo y rápido, el material sale rápido cuando hay cambios en el temario de GARP, y los ejercicios y exámenes son muy útiles para practicar.
diana
2021-07-17
So helpful. I have been using the videos to prepare for the CFA Level II exam. The videos signpost the reading contents, explain the concepts and provide additional context for specific concepts.
The fun light-hearted analogies are also a welcome break to some very dry content.
I usually watch the videos before going into more in-depth reading and they are a good way to avoid being overwhelmed by the sheer volume of content when you look at the readings.
Kriti Dhawan
2021-07-16
A great curriculum provider. James sir explains the concept so well that rather than memorising it, you tend to intuitively understand and absorb them.
Thank you ! Grateful I saw this at the right time for my CFA prep.
nikhil kumar
2021-06-28
Very well explained and gives a great insight about topics in a very short time. Glad to have found Professor Forjan's lectures.
Marwan
2021-06-22
Great support throughout the course by the team, did not feel neglected
Benjamin anonymous
2021-05-10
I loved using AnalystPrep for FRM.
QBank is huge, videos are great.
Would recommend to a friend
Daniel Glyn
2021-03-24
I have finished my FRM1 thanks to AnalystPrep. And now using AnalystPrep for my FRM2 preparation. Professor Forjan is brilliant. He gives such good explanations and analogies. And more than anything makes learning fun. A big thank you to Analystprep and Professor Forjan. 5 stars all the way!
michael walshe
2021-03-18
Professor James' videos are excellent for understanding the underlying theories behind financial engineering / financial analysis. The AnalystPrep videos were better than any of the others that I searched through on YouTube for providing a clear explanation of some concepts, such as Portfolio theory, CAPM, and Arbitrage Pricing theory. Watching these cleared up many of the unclarities I had in my head. Highly recommended.