So, we have a floating rate bond in our portfolio. This is issued at discount (98.5). The coupon payments of this bond is planned to be paid semi-annually. The coupon rate is tied to 6 months LIBOR + spread (2.75). Now I am trying to understand accounting stuff and want to build an amortization schedule for this bond. The face amount of this bond is 100 MIO USD. Consequently, we have 1.5 MIO USD discount that should be amortized during the lifetime of the bond (5 years). It’s relatively easy to build an amortization schedule if the coupon rate was fixed. However, I cannot figure out how one could properly amortize the discount of this type of bond. I mean, the spread is constant but LIBOR rate is variable. I have tried several scenarios with different LIBOR rates. So I generated 10 hypothetical coupon rates and calculated YTM at each point. However, the sum of the 10 six-months amortization values is not equal to the initial 1.5 MIO. Why is that? The total sum of amortization must be equal to 1.5 MIO at the maturity, right? I would be grateful if someone could explain this to me. Thanks.
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How is it possible for a floating rate bond to be issued at a discount/premium?
I think you can just straight -line the amortization.
You cannot use the traditional approach because in a floating rate bond, the stated rate and effective rate should be equal.
How do floating-rate bond portfolios perform in a rising rate environment? (Originally Posted: 10/27/2017)
Title says it all. I am a big fan of BDCs as a personal investment, but quite frankly I am not exactly sure how they should perform if the Fed were to keep raising rates, considering many portfolios are heavy in floating rate term loans of private/small companies. Do existing floating rate loans decrease less in value than fixed? Or not at all?
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