A company’s bond with a remaining four-year term has a coupon that is reset every six months to maintain a premium quote of 120 basis points above LIBOR.
a. Research the current 6-month LIBOR rate and give the current coupon rate.
b. If the reset rate was 5% and not set to LIBOR, evaluate how this formula would be better or worse in an increasing interest rate environment and analyze in what situations a company would prefer using this rate as opposed to the one shown above (120 basis points + 6-month LIBOR). Discuss the importance of rates set to LIBOR.