Question

The value of a floating rate bond is always equal to its par value. Do you agree? Please use a numerical example to prove your argument.

Answer 1

Yes, I agree that the floating rate bond is always equal to its par value.

For example, consider the following scenario:

Face Value of bond = 100

6-month LIBOR = 10%

In above scenario since floating rate bonds set their coupon rate in arrears advance, therefore if it is to be paid in 6 months, it is set today at 6-month LIBOR and discounted at 6-month LIBOR.

Therefore, from above scenario,

Price of floating rate bond today = (Face Value + Bond Payment)/(1+Bond Rate)

                                                      = (100 +10) / (1 + 0.1)

                                                      = 110/1.1

                                                      = 100

Therefore, a floating rate bond is always equal to its par value.