A dual-currency bond makes coupon payments in one currency and pays
the par value at maturity in another currency. A currency option bond
gives the bondholders the right to choose the currency in which they want
to receive each interest payment and principal repayment. A pure discount
bond is issued at a discount to par value and redeemed at par.
Fixed Income MCQ - Fixed Income Section 1
12
Carla owns a floating rate note. Interest payments for the note are to be made on a semiannual basis with the second payment due in December 2013. The agreed upon coupon rate is six-month LIBOR + 30 bps. The table below shows the six-month LIBOR rates for the year 2013:
| Date | Six-month LIBOR |
| January 1, 2013 | 5.0% |
| June 30, 2013 | 5.5% |
| December 31, 2013 | 6.0% |
Which of the following is most likely to be the applicable interest rate for the
second payment?
The applicable interest rate for the second payment due in December is
the six month LIBOR at the end of June 2013 plus 30 bps. Therefore,
5.5% + 0.3% = 5.8%.
The interest rate that should be used to calculate the payment due in
December 2014 is the six-month Libor at the beginning of the period
(i.e. the end of June 2014) plus 50 bps. Thus, it is 4.50% (4.00% +
0.50%).
Collaterals are assets underlying the debt obligation above and beyond
the issuer’s promise to pay. Credit enhancements are provisions that
may be used to reduce the credit risk of the bond issue. Covenants are
clauses that specify the rights of bondholders and obligations of the
issuer.
A letter of credit is an external credit enhancement. A legal contract
under which a bond is issued is called indenture or a trust deed.
