Serving the Quantitative Finance Community
What bond is based on LIBOR?
LIBOR is an offered rate, not a market rate. It is fixed by a process overseen by the British Bankers' Association rather than an arm's length trade.Many bonds pay interest based on LIBOR, generally LIBOR plus a spread. But the market price of these bonds does not determine the LIBOR rate (as with, say, US Treasuries); the fixed LIBOR determines the coupon payment of these bonds (and thus indirectly influences the market price).
What bond is based on LIBOR?
relica,You may be referring to a Floating Rate Note (or FRN), which is a bond whose coupon is periodically reset to then-current short-term rates. An example might be a 5-year bond whose 6-month coupon is set every half year to the then-current value of 6-month LIBOR. Since the coupon is periodically reset, the duration of FRNs is fairly small and they exhibit fairly low price volatility.
What bond is based on LIBOR?
When pricing a FRN spread over Libor is a measure of credit quality of the issuer; for corporate bonds the spread expresses rating and risk of issuer (often used for subordinated lower / upper tier II issues). Many financially troubled companies downgraded by rating agencies from investment grade to speculative grade could see the spread of their bonds over Libor rising of hundreds bps.On BBA site there’s a good detailed definition of Libor fixing.