What is special about a bond with a 'floating' interest rate?

• A. The rate is fixed for the life of the bond
• B. It pays no coupons
• C. The interest rate may go up or down periodically
• D. It is always tied to inflation

Answer: (C)

Floating-rate bonds are defined by coupons that reset at intervals based on a reference rate (like SOFR or LIBOR) plus a fixed spread. Because the reference rate moves with current market conditions, the actual interest paid can rise or fall at each reset. This means the income stream isn’t fixed for the life of the bond, unlike traditional fixed-rate bonds where coupons stay the same. It also helps reduce sensitivity to interest-rate changes, since when rates go up, the coupon adjusts upward, and when rates fall, the coupon adjusts downward. They’re not inherently tied to inflation, which is a separate concept used in inflation-linked bonds. So the special feature is that the interest rate may go up or down periodically.