Fixed/Floating Rates and the relationship between interest rates

CFA Level III
#1

Hi-

So the study guide says with an increase in interest rates, a holder of a fixed rate asset would want to swap into a floating rate asset because it increases the cash received and minimized the maket value decline. Maybe i get why a floating rate asset would increase cash receive because the reinvestment income would increase from the increase in interest rates, but i’m not getting why it would min. market value decline. Wouldn’t an increase in interest rates for a floating rate bond still decrease the market price of the bond? i’m not getting why it would minimize less compared to a fixed rate bond.

#2

minimization of market value decline … is because your reinvestment income is higher. On a total return basis - your total return = Price + Reinvestment Income. The reinvestment income offsets the price decline.

For a fixed rate bond - you do not get a higher reinvestment income, but the price declines nonetheless, so effect on a fixed rate bond is bigger.

#3

makes sense. Thank you!

#4

floaters adjust evry coupon so thats why they have very low duration