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Basic Question 9 of 9
Which of the following statements is (are) valid regarding the interest rate risk for floating rate securities? The price of a floating-rate security will fluctuate because ______
II. the required margin that investors demand in the market changes.
III. a floating-rate security will typically have a cap.
I. the longer the time to the next coupon reset date, the greater the potential price fluctuation.
II. the required margin that investors demand in the market changes.
III. a floating-rate security will typically have a cap.
User Contributed Comments 4
| User | Comment |
|---|---|
| danlan | Why III is also correct? |
| anricus | Because as the investor required return increases the value of the FRN decreases since the floating rate has reached the CAP |
| nija | The cap xtics is good for the issuer to limit its risk exposure which cold have have been included in the indenture, unless the pay off could be liken to to the pay off of in-the money call option, geratet loss to the writer! |
| 2014 | See question number 3 for explanation. |
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Learning Outcome Statements
calculate and interpret yield spread measures for floating-rate instruments
CFA® 2024 Level I Curriculum, Volume 4, Module 8.