Corporate Bonds

Archive for the ‘Discount Notes’ Category

Risks of Floating Rate Notes #1: Interest Rate Risk

While the market value of Floating Rate Notes or floaters are relatively insensitive to changes in interest rates, the income received are, highly dependent upon the level of the reference rate over the life of the Floating Rate Notes investment.

Total return of Floating Rate Notes may be less than anticipated if future interest rate expectations are not met.

Risks of Floating Rate Notes #2: Credit Risk

Credit risk involves the scenario in which the issuer will be unable to meet its payment obligations.

Credit ratings serve as a measure of the issuer’s financial health and should be taken into account when considering a purchase of floaters.

In addition, because the spread paid in excess of the reference rate is determined in part by the issuer’s credit rating, changes in this credit rating can also affect the market value of the investment.

Risks of Floating Rate Notes #3: Call Risk

If a callable floater is called by the issuer prior to maturity, the investor may be unable to reinvest funds in another floater with comparable terms.

If the floater is not called, the investor should be prepared to hold it until maturity.

Investors should consider their need for steady income when investing in Floating Rate Notes or floaters because a decline in the benchmark used, will result in a lower interest payment. 

Floating Rate Notes or floaters are most suitable for purchasing and holding until maturity, but if necessary to sell prior to that, a secondary market does exist. 

Who Invests in Floaters?

Any investor looking to: 

• Diversify a fixed income portfolio in preparation for, or during, a rising interest rate environment.
• Maintain an income stream that follows movements in a given index.

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Some Investment Terms…

CPI

CPI Measures the average change in consumer prices for a fixed market basket of goods and clothing, shelter, fuel, transportation, medical care and pharmaceuticals. The CPI is published monthly by the U.S. Bureau, the most widely accepted measure of inflation. 

LIBOR

Libor is the base short-term rate of the Eurodollar market, charged by international banks concept to the U.S. Prime Rate.