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1. An FRN (floating-rate note) is a bond that pays a quarterly or semiannual coupon indexed on a short-term interest rate such as the LIBOR.

1. An FRN (floating-rate note) is a bond that pays a quarterly or semiannual coupon indexed on a short-term interest rate such as the LIBOR. (7 points)

(a) Why does it make sense to use a short-term interest rate as the index?

(b) Why are banks heavy issuers of FRNs?

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