A variable-rate bond is a bond which has a variable interest rate that varies as a percentage of a baseline indicator such as prime rate. The interest rate of such bonds varies as per a predetermined formula.
These bonds are preferred by investors to avert the volatility in interest rates. The market of variable bonds fluctuates less than the other bonds.
China issues 1st variable DR-based bonds
- China recently issued its first bond with a variable interest rate tied to a key benchmark named “DR”.
- The People’s Bank of China earlier announced about making Depository-Institutions Repo Rate (DR) as the key reference for monetary policy changes.
- The Export-Import Bank of China auctioned a 3-billion-yuan bond with floating rates pegged to seven-day DR, which is based on daily repo trading.
- China has now joined the other countries in the reforming of the benchmark rate framework. This is because the most widely used benchmark LIBOR is being phased out.
- This issuance of a variable DR-based bond will improve the benchmark rate system of China.
What is LIBOR?
LIBOR stands for London Interbank Overnight Rate. It is a calculation of interest rate which is used across the world for debt capital market transactions comprising loans, bond issuances, and derivatives. Its widespread use was started in the late 1970s. LIBOR is calculated at a cross-section of the average interest rate a bank can borrow funds from another bank.
In the last few years, LIBOR has been subjected to fraud, scandals, and also been a reason for collusion between banks. For this reason, the UK Financial Conduct Authority (FCA) has asked banks to move out of LIBOR and use other benchmark frameworks. LIBOR will not be published after the year 2021.
In February 2020, the Indian Banks’ Association (IBA) has also directed banks to prepare themselves for phasing out of LIBOR.