Consider the following ﬂoating rate bond: it has a face value of $100. Each half
year it pays coupon based on the current market returns over the half year that
has just ended. That is, if the market returns 3% from 15 January to 15 July
then the bond pays $3.
The bond matures in 10 years’ time, at which point the $100 face value is
returned to the purchaser.
How much would you pay for this ﬂoating rate bond? Why?

Question

Consider the following ﬂoating rate bond: it has a face value of $100. Each half
year it pays coupon based on the current market returns over the half year that
has just ended. That is, if the market returns 3% from 15 January to 15 July
then the bond pays $3.
The bond matures in 10 years’ time, at which point the $100 face value is
returned to the purchaser.
How much would you pay for this ﬂoating rate bond? Why?

tkhunny · Answer

What would you pay for a bond having NO assumption concerning the market during the lifetime fo the bond?