A large corporation issued both fixed and floating rate notes 5 years ago, with terms given in the following table:
|
9% Coupon Notes |
Floating Rate Note |
|
|
Issue size |
$250 million |
$280 million |
|
Original Maturity |
20 years |
10 years |
|
Current price (% of par) |
93 |
98 |
|
Current coupon |
9% |
8% |
|
Coupon adjusts |
Fixed coupon |
Every year |
|
Coupon reset rule |
— |
1 year T bill rate 2% |
|
Callable |
10 years after issue |
10 years after issue |
|
Call price |
106 |
102.50 |
|
Sinking fund |
None |
None |
|
Yield to maturity |
9.9% |
— |
|
Price range since issued |
$85–$112 |
$97–$102 |
a. Why is the price range greater for the 9% coupon bond than the float in grate note?
b. What factors could explain why the floating rate note is not always sold at par value?
c. Why is the call price for the floating rate note not of great importance to investors?
d. Is the probability of call for the fixed rate note high or low?
e. If the firm were to issue a fixed rate note with a 15 year maturity, what coupon rate would it need to offer to issue the bond at par value?
f. Why is an entry for yield to maturity for the floating rate note not appropriate?