Inverse floaters are types of bonds that are similar to the floating rate bond in that the coupon is not fixed and is linked to a benchmark however, the differentiating thing is that the rate is inversely related to the benchmark. In such cases, on every interest payment date, the payment will be made 0.50% more than the treasury bill rate prevailing on the fixing date. For example, a company may issue a floating-rate bond as Treasury bond rate + 50 bps (100 bps = 1%). Floating Rate Bondsįloating rate bonds are so-called because they have a coupon that is not fixed but instead linked to a benchmark. Such bonds are usually issued by companies where revenues/ profits are expected to decline in a phased manner this may be due to wear and tear of the assets or machinery, as in the case of leasing. They may also be designed to step down not once but in a series. These are bonds where the coupon usually steps down after a certain period. The step-down bonds are just the opposite of Step-Up Bonds. These are also called dual coupon or multiple coupon bonds. Such bonds are usually issued by companies where revenues/ profits are expected to grow in a phased manner. They may also be designed to step up not once but in a series. The step-up bonds are where the coupon usually steps up after a certain period. Examples of companies that may issue such bonds include construction companies. Such bonds are issued by corporates whose business model has a gestation period before the actual revenues start. These bonds do not pay any coupon in the initial years and, after that, pay a higher coupon to compensate for no coupon in the initial years. The deferred coupon bond is a blend of a coupon-bearing bond and a zero-coupon bond. In layman’s terms, it is the value of the bond on its maturity. Face ValueĮvery bond issued has a face value, which is usually the principal amount that is borrowed and returned on maturity. In the US, there are mainly 4 major bond issuers, including the government, government agencies, municipal bodies, and corporates. The entities that borrow money by issuing bonds are called issuers. Let us look at the common features and the financial terms related to bonds. Using Annuity for Valuing Longer-Term Bonds.Find Present Value of the Cash Flows, i.e., Market Value of Bond.
Determining the Appropriate Discounting Rate.
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