Discuss a type of bond that interests you and how it is differentiated from other bonds. Then explain how interest rates affect their value.

Bond valuation: (250 words) | Business & Finance homework help

One type of bond that interests me is a floating rate bond. This is a type of bond where the interest rate on the principal amount varies with market conditions, and is typically adjusted every three months. It differs from other bonds because it offers more liquidity than traditional bonds which have fixed rates, and can therefore offer greater flexibility in times when interest rates are volatile.

Interest rates affect the value of these types of bonds in two ways: firstly, when interest rates rise, the coupon or yield paid by similar bonds will increase, making them more attractive to potential investors whereas floating rate bonds may remain less desirable as their coupon does not change. Secondly, if an investor buys a floating-rate bond at par (face value), then its actual value will decrease as market interest rates rise since it will no longer be paying what could be found elsewhere in the market. On the flip side however, if market rates decline then so too will the coupon amount being paid by new issues; while existing floating-rate notes would benefit from this decrease as they continue to pay a higher than current rate on the same principal amount.

Overall I find this type of bond particularly interesting due to its risk management capabilities and ability to provide steady income flows in changing markets environments.