- CFA Exams
- CFA Level I Exam
- Topic 6. Fixed Income
- Learning Module 8. Yield and Yield Spread Measures for Floating-Rate Instruments
- Subject 1. Yield and Yield Spread Measures for Floating-Rate Notes
CFA Practice Question
A variable rate note resets its coupon rate to six-month LIBOR + .0025 every six months. The most recent coupon reset date was Monday, at which time the coupon rate was set at 6.25%. Later in the week, the Federal Reserve announced that due to unexpected growth in wages, the discount rate will be increased and the rate of growth in the money supply will be dampened. In response to these announcements, ______
B. the price of the variable rate note will remain at par.
C. the price of the variable rate note will decline below par.
A. the price of the variable rate note will rise above par.
B. the price of the variable rate note will remain at par.
C. the price of the variable rate note will decline below par.
Correct Answer: C
The coupon rate is fixed until the next reset date. To reflect the higher interest rate environment, the price of the note will decrease.
User Contributed Comments 6
| User | Comment |
|---|---|
| mrushdi | good question, |
| DonAnd | excellent question |
| JakeZ | excellente |
| 2014 | Price would decline, because offered rate is less than current market rate |
| gill15 | What if the fed decreased the rate? Since the required margin changes the investors demand -- if the fed rate increases you demand a higher margin and dont get it the prices fall....but if the fed rate decreases your not going to demand less --- I'm assuming the price would stay the same... |
| houstcarr | no gill |