On April 1, 2000, a corporation rated AA has issued a semiannual FRN in dollars. This is a perpetual bond, which will pay coupons indefinitely if the corporation does not default. The coupon is set at six-month LIBOR plus a spread of ½ %. The six-month dollar LIBOR is equal to 5%.
a. Three months later (July 1, 2000), the corporation is still rated AA and the market-required credit spread for AA is still at ½%. We observe the following LIBOR rates:
$$\begin{array} { c c c }
\hline \text { 1-Month } & \text { 3-Month } & \text { 6-Month } \
\hline 3\quad 3 / 4 \% & 4 \% & 5 \% \
\hline
\end{array}$$ Give an estimation of the total value of the bond. What should be its quoted price?
b. Three months later (October 1, 2000), the coupon has just been paid. The six-month dollar LIBOR is again at 5%, but the market-required spread for AA-rated corporations on long-term FRNs has moved to 1%. Give some estimation of the new value of the FRN on reset date.

Question

On April 1, 2000, a corporation rated AA has issued a semiannual FRN in dollars. This is a perpetual bond, which will pay coupons indefinitely if the corporation does not default. The coupon is set at six-month LIBOR plus a spread of ½ %. The six-month dollar LIBOR is equal to 5%.
a. Three months later (July 1, 2000), the corporation is still rated AA and the market-required credit spread for AA is still at ½%. We observe the following LIBOR rates:
 $$\begin{array} { c c c } 
\hline \text { 1-Month } & \text { 3-Month } & \text { 6-Month } \
\hline 3\quad  3 / 4 \% & 4 \% & 5 \% \
\hline
\end{array}$$ Give an estimation of the total value of the bond. What should be its quoted price?
b. Three months later (October 1, 2000), the coupon has just been paid. The six-month dollar LIBOR is again at 5%, but the market-required spread for AA-rated corporations on long-term FRNs has moved to 1%. Give some estimation of the new value of the FRN on reset date.

Quizplus · Accepted Answer

The Answer of On April 1, 2000, a corporation rated AA has issued a semiannual FRN in dollars. This is a perpetual bond, which will pay coupons indefinitely if the corporation does not default. The coupon is set at six-month LIBOR plus a spread of ½ %. The six-month dollar LIBOR is equal to 5%.
a. Three months later (July 1, 2000), the corporation is still rated AA and the market-required credit spread for AA is still at ½%. We observe the following LIBOR rates:
 $$\begin{array} { c c c } 
\hline \text { 1-Month } & \text { 3-Month } & \text { 6-Month } \
\hline 3\quad  3 / 4 \% & 4 \% & 5 \% \
\hline
\end{array}$$ Give an estimation of the total value of the bond. What should be its quoted price?
b. Three months later (October 1, 2000), the coupon has just been paid. The six-month dollar LIBOR is again at 5%, but the market-required spread for AA-rated corporations on long-term FRNs has moved to 1%. Give some estimation of the new value of the FRN on reset date.

On April 1, 2000, a Corporation Rated AA Has Issued