MBA (General)IV – Semester, International Business Unit V
Definition of Minimax and Capped FRNs
FRN have traditionally been issued with a minimum rate embedded in the contract. Some, called minimax FRNs, have been issued with a minimum and a maximum rate. Others called capped FRNs, have been issued with only a maximum rate. A minimum rate is an advantage for the investor while a maximum rate is an advantage for the issuer.
Minimax and Capped FRNs
FRN have
traditionally been issued with a minimum rate embedded in the contract. Some, called minimax FRNs, have been issued with a minimum and a maximum
rate. Others called capped FRNs, have
been issued with only a maximum rate. A minimum rate is an advantage for the investor
while a maximum
rate is an advantage for the issuer.
Convertible and Drop Lock FRNs
Some issues give the investor the right or the obligation to convert the FRN into a
long-term fixed rate bond. Convertible FRNs give the investor the option of
converting and are similar to debt
warrant FRNs. Drop lock FRNs make conversion automatic if the reference rate falls below some designated floor value.
Equity-Linked Bonds
Equity-linked
bonds are associated with the right to acquire equity stock in the issuing company. Some have detachable
warrants containing the acquisition rights, while others
and directly convertible into a specified number of shares.
The market value
of a convertible bond can be separated into two parts: the naked value and the conversion value. The naked
value is obtained by valuing the bond as if the conversion option did not exist. The conversion value of the
bond is added to the naked value to determine the market value
of the whole bond.
