Which one of the following four statements regarding floating rate bonds is incorrect?

Which one of the following four statements regarding floating rate bonds is incorrect?
A . Floating rate bonds have coupon payments tied to floating interest rates or floating interest rate indexes.
B . Floating rate bonds typically have less price risk than fixed rate bonds.
C . Floating rate bonds are very sensitive to changes in interest rates.
D . Floating rate bonds only have a small degree of interest rate risk.

View Answer

Answer: C

Explanation:

Floating rate bonds have coupon payments that are tied to a floating interest rate or index, such as LIBOR. This means their coupon payments adjust periodically with changes in the underlying interest rates. Due to this mechanism, floating rate bonds typically have less price risk compared to fixed-rate bonds because their coupon payments reset in line with current market rates. Hence, floating rate bonds are generally not very sensitive to changes in interest rates since the adjustments in coupon payments help maintain their value. Therefore, the statement that floating rate bonds are very sensitive to changes in interest rates is incorrect.