Question

In: Finance

Investors who believe that interest rates will rise most likely prefer to invest in: A) inverse...

Investors who believe that interest rates will rise most likely prefer to invest in:

A) inverse floaters

B) fixed-rate bonds

C) floating-rate notes.

Solutions

Expert Solution

Floating rate notes:

Floating rate notes is a bond that has variable coupon rates. The coupon rate is equal to money markets reference rate like LIBOR or Federal fund rates, maybe with a spread for example: LIBOR+1%.

The spread remains constant.

So a rise in interest rate will benefit floating-rate notes.

In the case of fixed-rate bonds, there is no benefit of rise in interest rates.

Inverse floaters are the opposite of floating-rate notes. Its coupon rate has an Inverse relationship to money market rates.

Answer: C) floating-rate notes.

jeff jeffy answered 2 years ago
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