Question

Let's say you choose a floating rate bond bond in an effort to manage your risk in an environment of rising interest rate. How would you justify this loss in exchange for the other risks when choosing a different bond?

Answer 1

A floating rate bond will always be trying to adjust its coupons according to the market rate of interest, so that the bond holder is not facing any market risk due to change of the interest rates So, it is basically to counter the interest rate fluctuations.

I would justify this loss in exchange for other risk because the bond is more prone to an interest rate risk rather than other risk like inflation risk or reinvestment risk because the interest rate are frequently changed by monetary policy, and the bond is always subject to get exposed to that risk regularly and I would be more happy to negate the primary risk associated with the bond investment rather than all other, because those risk will not dilute the value of bond to large extent