Solve this, valuing a perpetual FRN

CFA Level III
#1

Deal of teh century?

The security is a floating rate Perpetual, payment of reference rate + 1.25% paid quarterly in perpetuity. No call dates, been on for a long time. Bottom of the queue regarding seniority (highly risky)

The current price is 71.15.

Ref rate is 3.0483%

Yield = ( 3.0483 +1.25) = 4.29%

This implies a yield on the security of ( 3.0483 +1.25) / 71.15 = 6.04% if my knowledge of valuing perpetuities ( Price = Coupon / yield)

6.04% - 4.29 % = 1.74%

CDS spread on 10 yr subordinated debt is 1.816% which is greater than 1.74%. therefore not deal of the century at all.

I feel I am not understanding something here but am unsure what it is… Please help

#2

How frequently does the coupon reset?

#3

I am not sure what 4.29% v 6.04% has to do with the CDS spread. That would apply only if the 10Y treasuries (or whatever reference default-free securities you use to compute the spread) sold at par and yielded 4.29%.

I can sell you junk bonds with a 20% yield at a price of 25, that doesn’t mean the spread is 15%. (15% = 20% if price is 25 - 5% if price = 100.)