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6. Just as other international investors, I am risk-averse. The uncertain volatility in interest rate, so called interest rate risk, is what I am concerned
6. Just as other international investors, I am risk-averse. The uncertain volatility in interest rate, so called interest rate risk, is what I am concerned with. For the international bond investment, I am advised to invest in the floating-rate notes (FRN) instead of investing in any fixed rate bonds. Let's assume that semi-annual coupon rate for a fixed rate bond is 2.5% and semi-annual coupon rate for FRN will be determined by a formula (1/2 x (LIBOR + x%)), where x% is the default risk premium and currently is 0.125% and currently LIBOR is 4.875%. What happen to coupon payment if LIBOR changes to either 4% or 5%? And how can the change in LIBOR and therefore the change in coupon payment help me to hedge against the interest rate risk
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