CFA Practice Question

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CFA Practice Question

When a company has floating-rate debt outstanding, which party benefits from an increase in market interest rates?

A. The company issuing the bonds
B. The investment banker
C. The bond investor
Correct Answer: C

The bond investor benefits from an increase in interest rates because the issuing company will pay more interest than before. When market interest rates increase, LIBOR also increases.

User Contributed Comments 11

User Comment
jooey LIBOR = London Interbank Offered Rate According to the Wall Street Journal, the LIBOR is "the average of interbank offered rates for dollar deposits in the London market based on quotations at five major banks." The rate is published daily in the Wall Street Journal "Money Rates" section.
Done Also in The Financial the way is a much better paper.
Nightsurfer Economically, I don't think either benefit. At a floating rate, the liability will maintain its value during up or down swings in i. This to say, it is neither at a premium or discount, just face value. An increase in interest rates means more CF for the creditor but, ultimately, he's no better off economically.
thud compared to a normal bond (fixed coupon rate) holder, a floating-rate bond holder is better off.
poomie83 what if interest decreases, the bond holder will be worse off.
jonan203 "LIE"bor
gill15 Why would the Bond investor benefit. I understand if the interest rate increases the company has to refinance at the higher rate and it is a disadvantage. But for an investor why would they care what happened. They're getting the same coupon rate and Face value regardless of what happens to interest rates.
robbiecow @gill15. It is because you are issuing a FRN (floating rate note) e.g., the rate is pegged to LIBOR + x bps.
farhan92 or like having a mortgage you are the issuer of the bond and as its floating rate the coupon payment increases so the investor gets more money to buy sweets.
forry9er @Gill15 - Robbie is correct. Think about what you receive when you're the bond investor: Interest payments + the face value at maturity. If you're interest payment is going to rise, than you make more money! Also - for trading purposes, the YTM also increases making your bond more valuable in the market place
Freddie33 Wtf has London got to do with this I'm so confused
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