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NEW QUESTION: 1
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NEW QUESTION: 2
A 5-year variable rate note issued by a BAA-rated issuer resets its coupon rate to 6-month LIBOR
+ .0075. At issuance, terms of the contract were determined so the issue would be priced at par. Three years after issue, credit conditions have changed and credit spreads have widened, i.e., the credit premiums charged lower credit quality borrowers are greater than during previous market conditions. In this new market environment:
A. the price of the variable rate note will be greater than par
B. the price of the variable rate note will equal par
C. the price of the variable rate note will be less than par
The margin compensates the note owner for the credit risk associated with the issuer. If this credit risk now requires a greater premium, the fixed margin will reduce the value of the note.
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