A five-year $1,000 face value floating-rate note (FRN)has coupons referenced to six-month dollar LIBOR,and pays coupon interest semiannually.Assume that the last six-month LIBOR was 6.5 percent and the current six-month LIBOR is 6 percent.If the risk premium above LIBOR that the issuer must pay is .25% by how much did the coupon payment change?
A)increase by $2.5
B)decrease by $2.5
C)increase by $5
D)decrease by $5

Question

Quizplus · Accepted Answer

The coupon payment decreased because the current LIBOR rate is lower than the previous rate. The change in LIBOR is 0.5% (6.5% - 6%), and with a $1,000 face value, this results in a decrease of $5 in the annual coupon payment. Since the coupon is paid semiannually, the decrease per payment is $2.5.

A Five-Year $1,000 Face Value Floating-Rate Note (FRN)has Coupons Referenced