<p>Floating-rate perpetual bonds will tend to rise or hold value with increasing market interest rates (in contrast to fixed rate bonds, which tend to exhibit and inverse relationship between price and rates).</p>

<p>However, is it also the case that these bonds will increase in value (or hold value) if mortgage rates increase due to tougher capital requirements imposed by financial regulators?</p>

<p>The particular bonds in question trade at some fixed premium above the bank bill swap rate and can only be redeemed by the issuer by trading on the open market.</p>

<p>I am trying to solve a very specific problem here so I might as well just outline my scenario if that helps:</p>

<p>I hold a mortgage at an interest rate that is currently <em>lower</em> than the post-tax interest rate on floating-rate perpetual (unsecured) notes on some of the major banks in my country (Australia).</p>

<p>In the event of rising interest rates, I would expect the value of those bonds to increase accordingly, affording me the option of selling the bonds at a higher value and paying off more of the mortgage than I otherwise would have. If interest rates remain constant, I will have increased my income as these bonds pay out more than the repayments on my mortgage.</p>

<p>I am therefore considering buying these bonds instead of making repayments on my mortgage. The risk of this trade are;</p>

<ol>
<li>Interest rates dropping further and remaining low for the duration of the life of my loan, and</li>
<li>the default of the bank issuing the bonds.</li>
</ol>

<p>Both are risks I am willing to take, and beyond the scope of this question anyway. I am not asking about personal financial advice.</p>

<p>My question is; <em>are my assumptions correct</em>?</p>

<p>If mortgage rates increase because, as has happened recently in Australia, the regulator imposes tighter capital requirements on banks, would one expect the value of unsecured bonds issued by that bank (which, critically, do not count towards said capital requirements) also appreciate in value?</p>

CC BY-SA 3.0
2016-07-18T03:31:34.480Z
Your assumptions look correct, although its possible that its not the rate on mortgages that increases but the requirements to receive a mortgage that get tougher. Presumably, the value of the unsecured bonds would increase if it is deemed that the bonds are safer than before. However, if the bonds were going t be paid by the government anyway in case of a financial sector rescue, then the bonds aren't any safer after the change in rules. Instead, its the public's taxes that are more safely protected from being used to rescue banks...
Fix.B.
CC BY-SA 3.0
2016-07-20T00:23:59.887Z
Floating rate bonds should not increase in value if interest rates rise (or fall), as they are designed to track prevailing interest rates at all times.  Their values will be affected by the perceived risk of the borrower not being able to continue the interest payments
Henry
<interest-rate><bonds>
How will perpetual floating rate bonds respond to tighter capital requirements?
quant
# How will perpetual floating rate bonds respond to tighter capital requirements?

(Asked by: username_0 on 2016-07-16)

Floating-rate perpetual bonds will tend to rise or hold value with increasing market interest rates (in contrast to fixed rate bonds, which tend to exhibit and inverse relationship between price and rates).

However, is it also the case that these bonds will increase in value (or hold value) if mortgage rates increase due to tougher capital requirements imposed by financial regulators?

The particular bonds in question trade at some fixed premium above the bank bill swap rate and can only be redeemed by the issuer by trading on the open market.

I am trying to solve a very specific problem here so I might as well just outline my scenario if that helps:

I hold a mortgage at an interest rate that is currently *lower* than the post-tax interest rate on floating-rate perpetual (unsecured) notes on some of the major banks in my country (Australia).

In the event of rising interest rates, I would expect the value of those bonds to increase accordingly, affording me the option of selling the bonds at a higher value and paying off more of the mortgage than I otherwise would have. If interest rates remain constant, I will have increased my income as these bonds pay out more than the repayments on my mortgage.

I am therefore considering buying these bonds instead of making repayments on my mortgage. The risk of this trade are;

1. Interest rates dropping further and remaining low for the duration of the life of my loan, and
2. the default of the bank issuing the bonds.

Both are risks I am willing to take, and beyond the scope of this question anyway. I am not asking about personal financial advice.

My question is; *are my assumptions correct*?

If mortgage rates increase because, as has happened recently in Australia, the regulator imposes tighter capital requirements on banks, would one expect the value of unsecured bonds issued by that bank (which, critically, do not count towards said capital requirements) also appreciate in value?

**Tags:** interest-rate, bonds

> **Comments:**
> **username_1**: Your assumptions look correct, although its possible that its not the rate on mortgages that increases but the requirements to receive a mortgage that get tougher. Presumably, the value of the unsecured bonds would increase if it is deemed that the bonds are safer than before. However, if the bonds were going t be paid by the government anyway in case of a financial sector rescue, then the bonds aren't any safer after the change in rules. Instead, its the public's taxes that are more safely protected from being used to rescue banks...  
> **username_2**: Floating rate bonds should not increase in value if interest rates rise (or fall), as they are designed to track prevailing interest rates at all times.  Their values will be affected by the perceived risk of the borrower not being able to continue the interest payments  

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## 0 answers

