A Company Without Default Risk Can Issue a Five-Year Dollar

question 48

Essay

A company without default risk can issue a five-year dollar 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 5%. Here are the dollar yield curves on two different dates:
$$\begin{array}{l}\begin{array} { c c c } &\text { May } 1,2006 \%& \text { Auget } 1,2006 \text { \% }\\1 \text { Month } & 0.00 & 5.00 \\ 3 \text { Manths } & 0.00 & 5.50 \\6 \text { Manths } & 0.00 & 6.25 \\12 \text { Manths } & 0.00 & 700\end{array}\end{array}$$ 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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Registry System

An organized system or database for the official recording, tracking, and management of information or documents, such as land titles, births, marriages, or automobiles.

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A form of co-ownership where all owners have equal rights to the whole property, and upon the death of one owner, their interest automatically passes to the surviving owner(s).

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The legal right to possess, use, and dispose of property or an asset.