Fixed Income - Fixed Income Section 1
- Option : C
- Explanation : For floating rate bonds denominated in U.S. dollars the reference rate is usually the U.S. dollar Libor. If coupons are paid quarterly the reference rate will usually be the U.S. dollar 3 month Libor.
32. Which of the following statements is the most accurate?
- A
Interbank offered rates are best described as the rates at which major banks can borrow from other major banks against some form of collateral.
- B
Interbank offered rates are best described as the rates at which major banks can issue short-term debt.
- C
Interbank offered rates are best described as the rates at which major banks can borrow unsecured funds from other major banks.
- Option : C
- Explanation : Interbank offered rates represent a set of interest rates at which major banks believe they could borrow unsecured funds from other major banks in the interbank money market for different currencies and different borrowing periods ranging from overnight to one year.
- Option : B
- Explanation : The coupon payments on a floating-rate bond that is tied to the six-month Libor will reset every six months, based on changes in Libor. Thus, as Libor increases, so will the coupon payments. A is incorrect because the spread on a floating-rate bond is typically constant; it is set when the bond is issued and does not change afterward. C is incorrect because the issuer’s credit quality affects the spread and thus the coupon rate that serves as the basis for the calculation of the coupon payments, but only when the spread is see that is, at issuance.
- Option : B
- Explanation : In an underwriting offering, the investment bank buys the whole issue from the issuer and takes the risk of reselling it to investors or dealers.
- Option : B
- Explanation : Statement I and III are correct. Statement II is incorrect because shelf registration is a form of public offering.
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