Question

As we know, floating rate bonds can trade at prices that are different from the par amounts. Which of the following is least likely a reason that this can happen?

a.         There is a potential time lag between the rate change in the market and the time when the coupon is reset

b.         The fixed margin on the floating rate security may differ from the   margin required by the market

c.         Resetting interest rates makes floating rate bonds more susceptible to the price risk that results from changing interest rates

Answer 1

Option C is correct. Resetting interest rates makes floating rate bonds more susceptible to the price risk that results from changing interest rates.

Prices of any bond i.e. Floating Coupon OR Fixed Coupon, are dependent on the prevailing interest rates in the market. The Prices and the Interest rates are inversely proportional to each other. So Resetting of interest Rate will alwyas make Floating Bonds more susceptible to the price risk that results from changing interest Rates.

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