A Company Without Default Risk Can Issue a Ten-Year FRN

question 33

Essay

A company without default risk can issue a ten-year FRN at LIBOR. The coupon is paid and reset semiannually. It is certain that the issuer will never have default risk and will always be able to borrow at LIBOR. The FRN is issued on November 1, 2005, when the six-month LIBOR is at 4.5%. Here are the dollar yield curves on two different dates:
$$\begin{array} { c c c } & \text { May } 1,2006 \% & \text { August } 1,2006 \% \\\hline 1 \text { Month } & 5.00 & 4.00 \\3 \text { Months } & 5.00 & 4.50 \\6 \text { Manths } & 5.00 & 5.25 \\12 \text { Months } & 5.00 & 6.00\end{array}$$ a. What should the value of the FRN be on May 1?
b. What should the value and the clean price of the FRN be August 1, 2006?

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Definitions:

Production Control

A business function that involves managing and directing the production process, ensuring products are produced efficiently, at the right quality, quantity, and cost.

Production Process

The method or series of actions taken to create a product or service, starting from raw materials to the final output.

Decorative Sculptures

Art pieces designed primarily for aesthetic appeal and ornamental purposes, rather than functional use.

Routing

Phase of production control that determines the sequence of work throughout the facility and specifies who will perform each aspect of production at what location.