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Question:
Consider the following statements:
Statement 1: Generally speaking, floating‐rate notes have less interest rate risk than fixed‐rate bonds.
Statement 2: The spread on a floating‐rate note varies with the issuer’s creditworthiness during the term of the bond.
Which of the following is most likely?
A
Only Statement 1 is correct.
explanation
FRN’s have lower interest rate risk than fixed‐rate bonds because the coupon rate on a FRN is reset periodically and brought in line with market interest rates. The spread on a floating‐rate note is determined at issuance based on the issuer’s creditworthiness at issuance.
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