Fixed-Income Types: Variable Interest Debt, Floating-Rate Notes

A firm issues a floating rate bond. The coupon payments are made every six months, and the market reference rate (MRR) is 4.3%. A change in the MRR to 4.1% will _most likely_:

Yes. The MRR is the reference rate that determines the future coupon payments. If the current MRR is 4.3% and this changes to 4.1%, then the next coupon payment will be reduced to reflect a lower interest rate environment.

Incorrect. For the issuing firm, a lower floating rate payment actually reduces its cost of financing.

Incorrect. Changes in the MRR are not likely to cause any change in bond rating. Only a change in credit risk would warrant a ratings change.

reduce the next coupon payment.

increase the firm's cost of financing.

cause a downgrade in the bond to occur.