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CFA Level I · CFA Level I Exam · Fixed-Income Instrument Features

An investor holds a floating-rate note that pays a coupon of 3-month reference rate plus 80 bps, reset quarterly. Compared with a fixed-rate bond of the same maturity, the floating-rate note's price is most likely:

The floating-rate note's price is less sensitive to market interest rate changes. Its coupon resets to the current reference rate each quarter, so the coupon stays near market levels and the price remains close to par, unlike a fixed-rate bond with locked-in coupons.

  1. Amore sensitive to changes in reference rates between reset dates.
  2. Bless sensitive to changes in market interest rates, because coupons reset to current rates.Correct
  3. Cmore sensitive to changes in market interest rates, because coupon payments vary.

Explanation

Because the coupon resets to the reference rate periodically, the floating-rate note's price stays close to par and has low interest rate sensitivity. Variable coupons do not raise price sensitivity; the fixed-rate bond has the longer effective duration.

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