- CFA Exams
- CFA Level I Exam
- Study Session 14. Fixed Income (1)
- Reading 42. Fixed-Income Securities: Defining Elements
- Subject 1. Basic Features of a Fixed-Income Security
CFA Practice Question
The price volatility of a variable rate note may be reduced by ______.
A. eliminating any put features
B. resetting the coupon rate more frequently
C. reducing the size of the issue or downgrading the quality rating
Explanation: VRNs carry little interest rate risk. A VRN has a duration close to zero, and its price shows very low sensitivity to changes in market rates. When market rates rise, the expected coupons of the VRN increase in line with the increase in forward rates, which means its price remains constant.
User Contributed Comments 4
| User | Comment |
|---|---|
| sh21 | can someone explain this? |
| VarunNK | longer the duration the coupon is reset more time is given for the rate to fluctuate and predict. Shorter the reset date easier is the prediction. |
| AllieBarrell | Expectations tend to overshoot actual fluctuations |
| toto123 | other options except from B will increase volatility |