Final answer:
To reduce the price volatility of a variable rate note, resetting the coupon rate frequently is an effective strategy as it aligns the interest more closely with market conditions and maintains investor confidence with low and reasonably steady interest rates.
Step-by-step explanation:
The price volatility of a variable rate note may be reduced by resetting the coupon rate frequently. Resetting the coupon rate more often allows the interest rate of the variable rate note to adjust to market conditions, which can become especially important if there are significant changes in interest rates. Frequent adjustments help mitigate the risk of interest rate fluctuations, making the security less volatile and more attractive to investors.
Reducing the size of the issue or downgrading the quality rating are not effective methods to reduce price volatility. In fact, a smaller issue size could potentially increase price volatility due to lower liquidity, and a lower credit rating would generally be associated with higher risk and higher volatility.
With low and reasonably steady interest rates provided by frequent coupon resets, the investors can expect less volatility in exchange rates as well, as advocated by those in favor of floating exchange rates.