Question

FLOATING RATE BOND All else equal, which bond will tend to have the most stable market value if interest rates fluctuate? Group of answer choices

a) U.S. Treasury bond Long-term,
b) low coupon bond Zero coupon,
c) short-term bond Floating-rate,
d) short-term bond AAA rated,
e) intermediate term bond

Answer 1

A floating-rate bond will tend to have the most stable market value when interest rates fluctuate because its coupon payments adjust with market rates, dampening the impact of rate changes on its price.

Step-by-step explanation:

The question is asking about the stability of market value of different types of bonds when interest rates fluctuate. Among the listed types, a floating-rate bond would tend to have the most stable market value because its coupon payments adjust to reflect changes in market interest rates. In contrast, a bond with a long term, low coupon, or zero coupon would be more sensitive to interest rate changes, exhibiting more price volatility as a result.

For instance, a U.S. Treasury bond offers more predictable returns and is considered safer than corporate bonds, which pay a higher yield to compensate for added risk. Therefore, the market value of both Treasury and high-rated corporate bonds (such as AAA rated) will fluctuate with changes in interest rates, but a floating-rate bond's value remains relatively stable because its coupon rate changes with the interest rates, reducing the impact of changes in market rates on its price.