Question-26: What is the difference between floaters and adjustable-rate security in bond market?

Answer: Usually, floaters have coupon rates that reset more than once a year for example semiannually, quarterly, or monthly. However, adjustable-rate or variable-rate security are those issues whose coupon rates reset not more than once annually.

Question-27: Can you describe few features of the floaters in bond market?

Answer: Following are the basic features of the floaters in bond market

• A floater may have a restriction on the maximum (minimum) coupon rate that will be paid at any reset date called a cap floor.
• The reference rate for most floaters is a benchmark interest rate or an interest rate index. A floater’s coupon could be indexed to movements in foreign exchange-rates, the price of a commodity for example crude oil, gold, silver etc.,  movements in an equity index.
• Floater’s coupon rate typically moves in the same direction as the reference rate, but it is possible that floaters whose coupon rate moves in the opposite direction from the reference rate. Which are called inverse floaters or reverse floaters.

Question-28: What do you mean by junk bond?

Answer: Structures or bond’s with very high-yield are considered junk bond.

Question-29: Why corporations prefer debt financing?

Answer: One reason that debt financing is quite popular with corporations is that the interest payments are tax-deductible expenses. As a result, the true after-tax cost of debt to a profitable firm is usually much less than the stated coupon interest rate.

Question-30: What is the relation with higher coupon and bond price volatility?

Answer: If coupon’s size is high it influences the volatility of the bond’s price: The larger the coupon, the less the price will change in response to a change in market interest rates. Hence, coupon has opposite effects on the price volatility of a bond.