Topic
Floating rate note
About: Floating rate note is a research topic. Over the lifetime, 139 publications have been published within this topic receiving 3463 citations.
Papers published on a yearly basis
Papers
TL;DR: In this article, the relationship between the quoted bid-ask spread and two serial covariances, the serial covariance of transaction returns and the serial correlation of quoted returns, is modeled as a function of the probability of a price reversal, 7r, and the magnitude of price change, a, where a is stated as a fraction of the quoted spread.
Abstract: The relation between the square of the quoted bid-ask spread and two serial covariances-the serial covariance of transaction returns and the serial covariance of quoted returns-is modeled as a function of the probability of a price reversal, 7r, and the magnitude of a price change, a, where a is stated as a fraction of the quoted spread. Different models of the spread are contrasted in terms of the parameters, 7r and a. Using data on the transaction prices and price quotations for NASDAQ/NMS stocks, 7r and a are estimated and the relative importance of the components of the quoted spreadadverse information costs, order processing costs, and inventory holding costs-is determined. THE QUOTED BID-ASK spread is the difference between the ask price quoted by a dealer and the bid price quoted by a dealer at a point in time. The realized bidask spread is the average difference between the price at which a dealer sells at one point in time and the price at which a dealer buys at an earlier point in time. Theories of the spread are theories of the quoted spread. The current literature implies that the quoted spread must cover three costs faced by a dealer: order processing costs, inventory holding costs, and adverse information costs. Order processing costs receive a greater emphasis in the early literature of Demsetz [5] and Tinic [19], but all researchers on the bid-ask spread recognize the importance of these costs. Inventory holding costs arising from the risk assumed by a dealer are modeled in Stoll [17] and Ho and Stoll [13], and Amihud and Mendelson [1] model the effect of constraints on inventory size. The role of adverse information costs is emphasized by Copeland and Galai [4], Glosten and Milgrom [7], and Easley and O'Hara [6]. Empirical studies have shown that the quoted spread is related to characteristics of securities such as the volume of trading, the stock price, the number of market makers, the risk of the security, and other factors. However, these results are roughly consistent with several theories of the spread and do not give much insight into the evolution of the spread over time or the relative importance of the cost components of the quoted spread. An implication of both the inventory cost model and the adverse information cost model is that the realized spread earned by a dealer is less than the spread * Owen Graduate School of Management, Vanderbilt University. This research was supported by grants from the Financial Markets Research Center and the Dean's Fund for Faculty Research at
1,108 citations
TL;DR: In this paper, the authors empirically investigated a contingent-claims model of commercial mortgage pricing and found that the magnitude of the observed default premia for a sample of non-prepayable fixed rate bullet mortgages can be explained by the contingent claims model.
Abstract: This paper empirically investigates a contingent-claims model of commercial mortgage pricing. We find that the magnitude of the observed default premia for a sample of nonprepayable fixed rate bullet mortgages can be explained by the contingent-claims model. In addition, the model explains a significant proportion of the period-to-period changes in the default premia. However, given an assumed negative correlation between building value changes and interest rate changes, the model's risk structure tends to increase less steeply with increasing maturity than the observed risk structure. SINCE THE SEMINAL WORK of Black and Scholes (1973), corporate liabilities have been modeled as options on the total value of the firm. This contingent-claims approach to bond pricing was refined by Merton (1974) to allow for cash dispersals prior to the bonds' maturities and by Brennan and Schwartz (1980) and Ingersoll (1987) to allow for interest rate uncertainty. Although variants of these bond pricing models are currently being used extensively on Wall Street, they have not been tested extensively. Moreover, empirical studies have not successfully accounted for the observed spread between the rates on risky and default-free debt. Jones, Mason, and Rosenfeld (1984) empirically investigate a model that assumes a nonstochastic term structure of interest rates, while Ramaswamy and Sundaresan (1986) examine a model with stochastic interest rates to price floating rate notes. In both cases, the models could not explain the observed default premia. The relative lack of empirical analysis is due partly to the complicated nature of corporate bonds. Major corporations generally have a large number of different bond issues outstanding that have different priorities in the event that the firm goes bankrupt. Moreover, the bonds can have a variety of covenants specifying sinking fund provisions, conditions under which technical default will occur, and other restrictions that can have an impact on their value. Although these complications do not preclude pricing various bond issues on a case-by-case basis, they make it difficult to test systematically the accuracy of the pricing model.
307 citations
TL;DR: This article showed that since the late 1980s, U.S. financial markets and private sector forecasters have become better able to forecast the federal funds rate at horizons out to several months.
Abstract: Yes. This paper shows that, since the late 1980s, U.S. financial markets and private sector forecasters have become (1) better able to forecast the federal funds rate at horizons out to several months, (2) less surprised by Federal Reserve announcements, (3) more certain of their interest rate forecasts ex ante, as measured by interest rate options, and (4) less diverse in the cross-sectional variety of their interest rate forecasts. We also present evidence that strongly suggests increases in Federal Reserve transparency played a role: for example, private sector forecasts of GDP and inflation have not experienced similar improvements over the same period, indicating that the improvement in interest rate forecasts has been special.
293 citations
TL;DR: In this article, the first major swap transaction was described, where the World Bank issued $290 million in eurobonds and swapped the interest and principal on these bonds with IBM for Swiss francs and German marks.
Abstract: The outstanding face amount of plain vanilla interest rate swaps exceeds two trillion dollars. While pricing and hedging of such swaps appear to be quite simple, many existing theories are based on the incorrect characterization of a swap as a simple exchange of a fixed for a floating rate note. This characterization is not consistent with standarized swap contracts and the treatment of swaps in bankruptcy. This paper provides an alternative perspective on swaps. THE FIRST MAJOR SWAP occurred a little more than a decade ago. In August 1981 the World Bank issued $290 million in eurobonds and swapped the interest and principal on these bonds with IBM for Swiss francs and German marks. The rapid growth in the use of interest rate swaps, currency swaps, and swaptions (options on swaps) during the last decade has been phenomenal. Currently, the amount of outstanding interest rate and currency swaps is almost $3 trillion. More than two-thirds of these swaps are relatively plain vanilla fixed/floating interest rate swaps denominated in a single currency. The first part of my talk focuses on fixed/floating interest rate swaps. While the hedging and valuation of fixed/floating swaps appears to be straight forward, there is more to these plain vanilla swaps than first meets the eye. Many existing theories value such swaps as exchanges of fixed and floating rate notes issued by the swap counterparties. However, the fixed rates quoted in the swap market do not reflect differences in borrowing costs between counterparties. Thus, these theories imply that swaps are mispriced and that two rational counterparties will not undertake a swap. The treatment of a fixed/floating interest rate swap in the event of a default is quite different from an initial exchange of fixed and floating rate notes. This difference is critical to understanding both the observed pricing of these swaps and the motivation for rational counterparties to enter into such transactions. The second part of my talk considers some widely used interest rate swaps that are less well known among academics. While most financial economists are aware of relatively common swaps such as fixed/floating interest rate swaps, few are aware of more esoteric features such as U.S. dollar LIBOR paid in Japanese yen (i.e., no currency conversion). The relative lack of academic research on these more complex transactions is partially at
146 citations
Posted Content•
TL;DR: In this paper, the authors present evidence that throughout the 1973-85 period the Federal Reserve systematically used certain types of discount rate announcements to signal changes in its policy instrument, the Federal funds rate.
Abstract: This paper presents evidence that throughout the 1973-85 period the Federal Reserve systematically used certain types of discount rate announcements to signal changes in its policy instrument, the Federal funds rate. Market participants understood the signals contained in discount rate announcements and used them to revise their expectations of the future path of the funds rate. These revisions in funds rate expectations caused movements in Treasury bill rates. The paper also presents evidence that discount rate announcements signaling changes in the funds rate had a strong effect on bond rates in the period since October 1979.
124 citations
Related Topics (5)
Performance Metrics
| Year | Papers |
|---|---|
| 2021 | 4 |
| 2020 | 5 |
| 2019 | 2 |
| 2018 | 1 |
| 2017 | 5 |
| 2016 | 3 |