Identifier: C2T3L3 | Revision: 2026-10-26

Decision and objectives

A floating-rate bond is offered as immune to rising rates. Test which payment resets, when it becomes known and which risks remain. Fixed coupons preserve the contractual rate; floating coupons link income to a stated reference plus or minus a margin. The margin and principal remain exposed to issuer credit even if the reference follows market rates.

Objectives: Calculate fixed and reset coupon cash; Use a compounded benchmark index ratio; Identify residual spread and reset risks.

Prerequisites: C2T3L2.

Mechanics

Read the reference definition, observation period, reset date, payment date, lookback or lag, floor, cap, spread, day count and fallback. A rate fixed at the start of a period differs from a realized overnight rate compounded during the period. TLREF is the Turkish Lira Overnight Reference Rate; Borsa publishes its methodology. A TLREF-linked security's final terms determine how that benchmark enters its coupon. Do not treat a single day's TLREF fixing as the entire coupon-period return.

Price and return drivers

For a supplied simple reset rule, coupon = nominal × (reference + margin) × days / basis. For an overnight compounded index rule, benchmark period return can be index at end / index at start − 1. A separately accrued simple margin may then be added if the contract says so. Some contracts compound or apply margins differently; this example's formula is deliberately explicit.

A floater's short reset interval often reduces benchmark-rate duration, but reset lag, caps, discount margins and credit deterioration can still move price. An older issue's fixed spread can become unattractive if investors require a much wider credit margin.

Worked case

Hypothetical TRY 100,000 nominal, 90-day ACT/365 period. Fixed-rate version pays annual 20%: coupon = TRY 4,931.51. Simple floater resets at reference 18% plus 2% margin and pays the same TRY 4,931.51 for this period.

A separate hypothetical compounded-index version uses start index 200.000, end index 210.000, plus simple margin 2% for 90/365. Benchmark return = 210 / 200 − 1 = 5%. Margin return = 0.02 × 90 / 365 = 0.493151%. Total coupon = 100,000 × (0.05 + 0.00493151) = TRY 5,493.15. These index values are fictional and not current TLREF observations. All results exclude fees and tax.

Adverse case

If next period's simple reference falls to 10%, the simple floater pays 100,000 × (0.10 + 0.02) × 90 / 365 = TRY 2,958.90. Income has fallen even if the bond stays near par. If benchmark rates rise but a contractual cap limits the total rate to 22%, a reference of 25% plus a 2% margin still pays only 100,000 × 0.22 × 90 / 365 = TRY 5,424.66. Credit-spread widening can create a capital loss alongside higher coupon income.

Practical use

Verify coupon announcements against the exact observation dates and calculation method. Distinguish a finalized coupon from an indicative projection. Obtain an executable dirty quote, not a par assumption. Accrued amounts for TLREF-related structures can have specific methods under the exchange procedure; ordinary fixed-coupon proportional accrual is not universally appropriate. Taxes and costs must be evaluated for the particular issue and investor; the current reference rate is intentionally not supplied.

Decision boundaries

Use a floater when the objective tolerates variable income and the reset structure matches the exposure. A fixed payment liability may be better served by known cash flows than by uncertain future coupons. Reject an income budget that needs the current high reset coupon to persist. A reference-rate link does not eliminate default, illiquidity, floor/cap or valuation risk.

Practice and references

Exercise: hypothetical TRY 80,000 principal; start index 150, end 156; margin 1.5% simple ACT/365 for 60 days. Answer: benchmark return 4%; margin return 0.246575%; coupon = 80,000 × (156 / 150 − 1 + 0.015 × 60 / 365) = TRY 3,397.26, before costs and tax.

Takeaway: reproduce the period return from the contract's observation rule before multiplying by principal.

Reference guide: floating-rate-bond, floating-coupon, index-ratio-coupon, TLREF, Reset risk, Discount margin.

Next: C2T3L4. Topic test: C2T3.

Primary sources (checked 2026-10-26; changing terms require a publication recheck): Borsa Istanbul announcement amending Debt Securities Market Procedure — 9.1.5; Annex 1; quotation and settlement price distinctions; TLREF Turkish Lira Overnight Reference Rate Methodology — 1.1; calculation and index sections; 6 Effective Date.

Shared reference guide