4.

4 BOND
ANALYSIS
( I N V E R S E F L O AT E R S A N D
F L O AT I N G R AT E S N O T E S )
(CALLABLE BONDS)
( C O N V E RT I B L E B O N D S )
INVERSE FLOATERS AND FLOATING RATE
NOTES
4.4.1 Inverse Floaters

- What is coupon rate?

- What is benchmark rate?
INVERSE FLOATERS

- Is a bond or other type of debt

whose coupon rate has an inverse
relationship to a benchmark rate.
An inverse floater adjusts its
coupon payment as the interest
rate changes.
►The price of inverse floater is
extremely sensitive in interest rate
movements.

► Interest rate (INCREASES) ,

Coupon rate and Bond price
(DECREASE).

► Interest rate (DECREASE)

Coupon rate and Bond Price
(INCREASES).
FLOATING RATE NOTES

► Is a bond whose coupon rates

moves in line with market rates.

► Exhibit low price volatility

and short durations.
 4.4.2 CALLABLE BONDS
► Some corporate bonds are CALLABLE.
(redeemable Bond).
► The issuer has a call option on the bonds.
► A rise in the bond price that make the
repurchase desirable would be brought
about by a fall in market interest rate or an
improvement in the credit rating of the
bonds.
CALLABLE BONDS AND INTEREST RATES
If market interest rates declines after a
corporation floats a bond, the company can
issue new debt receiving a lower interest rate
than the original callable bond. The company
uses the proceeds from the second, lower rate
issue to pay off the earlier callable bond by
exercising the call feature. As a result, the
company has refinanced its debt by paying off
the higher yielding callable bonds with the
newly issued debt at a lower interest rate.
 EXAMPLE:
► Let’s say a 6% coupon bond is issued and is
due to mature in five years . An investor
purchases 10,000 worth and receives coupon
payments of 6% times 10000 or 600 annually.
Three years after issuance, the interest rates
fall to 4% and the issuer calls the bond. The
bondholder must turn in the bond to get
back the principal and no further interest is
paid.
CONVERTIBLE BONDS
► A convertible bond is a fixed-income
corporate debt security that yields
interest payments but can be converted
into a predetemined number of common
stock or equity shares. The conversion
from the bond to stock can be done at
certain times during the bond’s life and is
usually at the discretion of the
bondholder.