A Company Without Default Risk Can Issue a Perpetual FRN

question 32

Essay

A company without default risk can issue a perpetual 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%. On May 1, 2006, the six-month LIBOR is at 5%.
a. What is the coupon paid on May 1, 2006, per $1,000 bond?
b. What is the new value of the coupon set on the bond?
c. On May 2, 2006, the six-month LIBOR has dropped to 4.9%. What is the new value of the FRN?

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Definitions:

Sales Bonuses

Additional financial compensation awarded to sales personnel for exceeding specified targets or performance levels.

Inventory Costs

The total costs associated with storing and managing goods until they are sold or used.

Yielding Conflict Management

A conflict resolution style where one party gives in to the wishes or demands of another, often to maintain harmony or avoid further conflict.

Issue Importance

The perceived significance or relevance of an issue, affecting the attention and resources dedicated to addressing it.