Tata Cleantech issued Floaters recently
Tata Cleantech ltd, a clean energy lender (click here for INRBonds report on Tata Cleantech bonds), issued floaters or floating rate bonds (FRB) last week. The 3 year maturity bond has a coupon rate that is linked to the 3 month treasury billl issued by government of India. The coupon or interest payable on these bonds are set at 160bps or 1.6% over the 3 month bill yield and is reset every year. For the 1st year, the coupon is fixed at 5%.
What are the factors that should decide your investment in floaters apart from factors like credit quality of issuer, maturity and interest rates offered?
Floaters - How they work
Many of you readers of SFY, would have taken a home loan. As you all know, home loan rates are not fixed and are linked to a benchmark prime lending rate, that changes whenever RBI reduces or raises interest rates. Hence when rates rise, the lender will send you a notice saying that the interest rate on your loan is set higher and when interest rates fall, ideally the rates on your home loan should fall.
Similarly in a floater, when interest rates rise, you will get higher coupon rate on the bonds and if rates fall you will get lower coupon rate as the floating rate benchmark yield also increases or decreases as the case may be.
Hence a simple factor that goes into your investment decision in a floater is whether interest rates are going up or down in the future.
Other factors to consider when investing in floaters
The floating rate benchmark should exhibit high correlation to RBI interest rate signals. Normally tbills and overnight money market rates and derivatives like swaps based on overnight money market rates exhibit the highest sensitivity to RBI interest rate policy.
Floaters are generally illiquid as their pricing is not perfect in secondary markets. You may not be able to sell the floaters or you may get a price that is well below market price when selling the floater.
Check for floaters on INRBonds Marketwatch
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