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Unformatted text preview: terbank offered rate (LIBOR). An additional amount, called quoted margin, is then added to or subtracted from the reference rate, as shown in Equation 34
34 Characteristics of Bond New coupon rate = Reference rate + Quoted Margin
Example New Coupon Rate
Suppose a corporation issues a floating rate bond that requires resetting the interest rate every 6 months. The reference rate is the 3month LIBOR and the quoted margin is 125 basis points. If the current 3month LIBOR is 5 percent, what is the relevant coupon rate for the next interest payment period?
Solution: Inserting the LIBOR = 5 percent and the quoted margin of 1.25 percent into
Equation gives a new coupon rate of 6.25 percent.
New coupon rate = 5.00% + 1.25% = 6.25%
35 Characteristics of Bond Maturity
Term to maturity or simply maturity of a bond is the length of time until the agreement expires. At maturity, the bondholder receives the last coupon interest payment and the bond’s par value payment from the issuer. On most bond issues, the maturity of all bonds occurs on the s...
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