Question

Which one of the following risks would a floating-rate bond tend to have less of compared to a fixed-rate coupon bond?

a)interest rate risk
b)default risk
c)liquidity risk
d)taxability risk

Answer 1

A floating-rate bond tends to have less interest rate risk compared to a fixed-rate coupon bond. Option a.

Step-by-step explanation:

A floating-rate bond tends to have less interest rate risk compared to a fixed-rate coupon bond.

Interest rate risk refers to the risk of changes in interest rates impacting the value of a bond. Floating-rate bonds have interest rates that adjust periodically based on a reference rate, such as the LIBOR.

This means that the interest payments of a floating-rate bond will increase if interest rates rise, providing a natural hedge against interest rate risk.

On the other hand, fixed-rate coupon bonds have a fixed interest rate that remains constant throughout the bond's term. If interest rates rise after the bond is issued, the fixed interest rate becomes less attractive, potentially causing the bond's value to decrease.

Therefore, floating-rate bonds have less interest rate risk than fixed-rate coupon bonds. Option a.