Floating Rate Notes

Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority and you can order it here)      

In commercial bank long-term public offerings of debt securities, unsecured notes paying interest at rates varying with the yield from time to time on a selected MONEY MARKET indicator, such as Treasury bills.

For example, the floating rate notes due in 1989 of Citicorp, the bank holding company, are unsecured obligations which pay interest semiannually at 1% above the interest yield equivalent of the average of the weekly per annum discount rates for three-month U.S. Treasury bills (as reported by the Federal Reserve Bank of New York during the 21 days immediately preceding May 20 or November 20, as the case may be) prior to the semiannual period for which the interest rate is being determined.  The notes are repayable only on June 1 or December 1 at the option of the holders at the principal amount plus accrued interest.  In turn, Citicorp at its option may redeem the notes at their principal amount plus accrued interest beginning June 1, 1984.

Another issue of floating rate notes due in 1986, issued by two Citibank subsidiaries and guaranteed by Citicorp, s denominated in French francs and translated into U.S. dollars at exchange rates current as of December 20.

Although intended to appeal to investors on a yield basis, the floating rate notes of 1989 have been redeemed in substantial amounts by the holders, posing a refinancing problem.  Also, although not an immediate or primary factor, the indenture under which these notes were issued prohibits Citicorp, under certain conditions, from paying dividends in shares of capital stock of Citibank and from creating encumbrances on such shares.  Moreover, as Treasury bill yields rose, the interest cost on such financing kept pace at the defined formula.

BIBLIOGRAPHY

FABOZZI, F.J.  Floating Rate Instruments.  Probus Publishing Co., Chicago, IL, 1986.

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