CFA Level I · CFA Level I Exam · Fixed-Income Markets for Corporate Issuers
A company issues a bond with a coupon that is reset every six months at a reference rate plus a fixed spread. Which risk is the investor in this bond most likely to reduce relative to a fixed-rate bond of the same maturity?
The investor most likely reduces interest rate price risk. A floating-rate coupon resets to the reference rate plus a spread, keeping the bond's price near par when market rates move. Credit risk and default risk remain tied to the issuer's ability to pay.
- ACredit risk
- BDefault risk on principal
- CInterest rate price riskCorrect
Explanation
Because the coupon resets to market rates, the bond's price stays close to par and is far less sensitive to rate changes. Credit and default risks depend on the issuer's creditworthiness, which a floating coupon does not remove.
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