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Multiple Choice
Most of the time, a floating-rate bond's coupon adjusts:
A
only at the time of bond issuance
B
periodically based on changes in a reference interest rate, such as LIBOR
C
when the issuer decides to change it
D
annually, regardless of market interest rates
Verified step by step guidance
1
Understand the concept of a floating-rate bond: A floating-rate bond is a type of bond where the coupon payments (interest payments) are not fixed but instead vary based on changes in a reference interest rate, such as LIBOR (London Interbank Offered Rate).
Identify the key feature of floating-rate bonds: The coupon rate adjusts periodically, typically at regular intervals (e.g., quarterly, semi-annually), based on the movement of the reference interest rate.
Clarify why the adjustment is periodic: The periodic adjustment ensures that the bond's coupon payments remain aligned with current market interest rates, protecting both the issuer and the bondholder from interest rate risk.
Eliminate incorrect options: Floating-rate bonds do not adjust only at issuance, annually regardless of market rates, or at the issuer's discretion. These options do not align with the standard mechanism of floating-rate bonds.
Conclude the correct answer: The coupon of a floating-rate bond adjusts periodically based on changes in a reference interest rate, such as LIBOR, ensuring the bond's interest payments reflect current market conditions.