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Why do you think a debt instrument whose interest rate is charged periodically based on some market interest rate would be more suitable for a depository institution than a long-term debt instrument with a fixed interest rate?

In the long run, which is more advantageous to a firm? Should a firm take a risk with the floating rate or go with the known fixed rate and why?

Why do you think a debt instrument whose interest rate is charged periodically based on some market interest rate would be more suitable for a depository institution than a long-term debt instrument with a fixed interest rate?

In the long run, which is more advantageous to a firm? Should a firm take a risk with the floating rate or go with the known fixed rate and why?

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Lelia Lubowitz
Lelia LubowitzLv2
2 Mar 2018

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Related questions

Why do you think a debt instrument whose interest rate is changed periodically based on some market interest rate would be more suitable for a depository institution than a long-term debt instrument with a fixed interest rate?

Can you explain intuitively why the interest-rate riskis positively associated with maturity but negatively associatedwith coupon rate of the debt instrument that you hold?


How does the interest-rate risk vary with the level ofinterest rates? For example, during the recession when marketinterest rates are low, does the overall level of interest-raterisk become higher or lower?


Imagine that you’re managing a portfolio of long- andshort-term bonds. If you predict a rise in interest rates, howwould you adjust your portfolio composition?


And how would you adjust your portfolio if you predicta fall in interest rates?


What is the relationship between interest rates andstock market?


How would you compare the degree of interest-rate riskand reinvestment risk between floating rate (variable rate oradjustable rate) bonds and fixed rate bonds? Floating ratebonds are bonds whose coupon payments are adjusted periodicallyaccording to market interest rates.


Can you explain intuitively how a bond laddermitigates interest-rate risk and reinvestment risk?


1. Futures Contracts Describe the general charac- teristics of a futures contract. How does a clearinghouse facilitate the trading of financial futures contracts?

2. Futures Pricing How does the price of a financial futures contract change as the market price of the security it represents changes? Why?

3. Hedging with Futures Explain why some futures contracts may be more suitable than others for hedging exposure to interest rate risk.

4. Treasury Bond Futures Will speculators buy or sell Treasury bond futures contracts if they expect interest rates to increase? Explain

7. Hedging with Futures Assume a financial institution has more rate-sensitive assets than rate-sensitive liabilities. Would it be more likely to be adversely affected by an increase or a decrease in interest rates? Should it purchase or sell interest rate futures contracts in order to hedge its exposure?

8. Hedging with Futures Assume a financial institution has more rate-sensitive liabilities than rate- sensitive assets. Would it be more likely to be adversely affected by an increase or a decrease in interest rates.

Should it purchase or sell interest rate futures contracts in order to hedge its exposure?

9. Hedging Decision Why do some financial insti- tutions remain exposed to interest rate risk, even when they believe that the use of interest rate futures could reduce their exposure?

10. Long versus Short Hedge Explain the difference between a long hedge and a short hedge used by financial institutions. When is a long hedge more appropriate than a short hedge?

11. Impact of Futures Hedge Explain how the probability distribution of a financial institution’s returns is affected when it uses interest rate futures to hedge. What does this imply about its risk?

12. Cross-Hedging Describe the act of cross-hedging. What determines the effectiveness of a cross-hedge?

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