Floating-rate bonds have adjustable rates to protect real rates of return against inflation. The rates paid are limited by
A)the put provisions of the issues.
B)a floor rate that sets the minimum.
C)a cap rate that sets the maximum.
D)a floor rate that sets the minimum and a cap rate that sets the maximum.

Question

Quizplus · Accepted Answer

Floating-rate bonds have a variable interest rate that changes periodically based on an underlying benchmark, such as LIBOR. The rates paid are typically limited by a floor rate that sets the minimum and a cap rate that sets the maximum, which helps protect investors against interest rate risk while allowing them to potentially benefit from rising rates. Put provisions may be included in some issues, but they are not typically used to limit the interest rate paid on floating-rate bonds. Therefore, option D is the correct choice as it includes both a floor rate and a cap rate.

Floating-Rate Bonds Have Adjustable Rates to Protect Real Rates of Return