IBM Floating Rate Note (Research Paper Sample)

Student Professor Course Date IBM Floating Rate Note Capital markets offer a convenient platform through which commercial entities raise funds to bolster their operational activities. The aftermath of the 2008-2009 financial crisis prompted various corporations to issue different securities such as floating rate notes, convertible notes, common stocks, and unsecured notes. Such financial assets were to spearhead economic recovery. On December 13th, 2010, IBM Corporation offered floating rate notes to implement its general corporate purposes. An analysis of these securities provides insight into how they differed from issues made by other firms such as Coca-Cola, Norfolk Southern, Ford, and Microsoft Corporation. A significant difference about IBM's issue concerns its decision to offer two-year and three-year floaters at a negative spread to Libor. Ideally, the company offered two-year notes worth $1 billion at three-month Libor minus two basis points (Longstaff, Mithal, and Neis, 2214). As a result, the issue listed IBM as one of the few organizations to have advanced a floater inside of Libor since the onset of the financial crisis. Aggressive pricing techniques utilized by the firm culminated in a surging demand as investors outmuscled each other to attain the floating rate debt securities. As well, an increase in the Treasury yields ensured further demand of the securities in the corporate bond market (Longstaff et al. 2218). In essence, IBM Corporation ranks as the third corporate issuer since the credit crisis to offer floaters at a negative spread to Libor. In 2010, IBM issued floating rate notes with quarterly interest payments, which is equivalent to a 3-month LIBOR plus 0.03%. Earlier in 2010, the company had advanced $ 1.5 billion of 3-year notes that contained a fixed coupon of 1.0% (Luehrman and Lane, 2). During this particular issue, the quoted coupon rate was the lowest in America's corporate bond issue. Ideally, floating rate notes (FRNs) are characterized by different coupons, which are equivalent to the reference rates in the money market such as LIBOR, federal funds rate, and a quoted spread (Longstaff et al. 2219). Thus, the rate of IBM’s floaters should be compared to these variants. Most FRNs issue interests after three months. Therefore, the coupon of each period is determined by adding the spread to the fixed reference rate for a specific day. An ideal coupon resembles a 3-month USD LIBOR +0.20% (Longstaff et al. 2221). However, the U.S. dollar 3-month LIBOR in December 2010 was 0.302%, which was high compared to the typical market rate. According to Luehrman and Lane, IBM Corporation is raising funds to bolster its general corporate purposes (2). These goals embody high-level objectives that are embedded in the company's vision and mission statements. For instance, the firm focuses on improving innovation that matters not only to the company but the entire world. Thus, it raises funds to spearhead further technological advancements to enhance the satisfaction and success of its clients (Longstaff e...