An Important Difference Between a Floating-Rate Note and a Fixed-Rate

question 34

Multiple Choice

An important difference between a floating-rate note and a fixed-rate note indexed to Libor is that

• A) The return from holding a fixed-rate note over any holding period is deterministic and known because of the fixed coupon payments, whereas the similar return on a floating rate note is unknown because the coupon "floats."'
• B) The price of the floating-rate note resets to par on each coupon/reset rate, whereas that of the fixed-rate note does not necessarily do so.
• C) The price of the fixed-rate note is deterministic and known because the bond pays fixed coupons whereas the floating-rate note has a fluctuating price because it pays floating interest rates.
• D) A fixed-rate note is always worth par at issue whereas the floating-rate note may not be.

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Definitions:

Business Combination

The process of merging two or more companies into a single entity, often to expand business operations or to enter new markets.

Consolidated Common Stock

The aggregation of common stock of a parent company and its subsidiaries, presented as total common stock in consolidated financial statements.

Common Stock

Common stock represents ownership shares in a corporation, giving holders voting rights and a portion of the company's profits through dividends.

Par Value

The nominal or face value of a stock or bond, as stated by the issuing company, that has no direct correlation to the market value.