Deleveraged Floater

One of the most striking differences in the investment world is between the way prices for stocks and bonds are quoted. Stocks are quoted in decimals of dollars and cents and are pretty unambiguous. Bonds, on the other hand, are priced relative to benchmarks, which can change intraday, and due to the size of bond trades, a few basis points spread can become sizeable to a trader.

Corporate bonds comprise a significant portion of fixed income investments. Pricing of corporate bonds is usually quoted in basis points of margin added to yield quote of the nearest benchmark Treasury, or if specified, LIBOR maturity. A bond calculation is then input to arrive at a dollar price that both buyer and seller can agree upon to close the trade.

Floating coupon bonds take the benchmark reference model and apply it to the coupon pay out. In a deleveraged floater, a fraction of the benchmark is used, then added to the margin to arrive at the coupon for the upcoming due payment as of the trade date.

If you are familiar with the notorious Stratton Oakmont firm as depicted in the movie, The Wolf of Wall Street, it’s easy to see why con men would have a difficulty bilking investors on corporate bonds, and why stocks are an easier vehicle.