Most of the time, a floating-rate bond's coupon adjusts:

• A. only at the time of bond issuance
• B. periodically based on changes in a reference interest rate, such as LIBOR
• C. when the issuer decides to change it
• D. annually, regardless of market interest rates

Answer: (B)

Verified step by step guidance

1. Understand the concept of a floating-rate bond: A floating-rate bond is a type of bond where the coupon payments (interest payments) are not fixed but instead vary based on changes in a reference interest rate, such as LIBOR (London Interbank Offered Rate).
2. Identify the key feature of floating-rate bonds: The coupon rate adjusts periodically, typically at regular intervals (e.g., quarterly, semi-annually), based on the movement of the reference interest rate.
3. Clarify why the adjustment is periodic: The periodic adjustment ensures that the bond's coupon payments remain aligned with current market interest rates, protecting both the issuer and the bondholder from interest rate risk.
4. Eliminate incorrect options: Floating-rate bonds do not adjust only at issuance, annually regardless of market rates, or at the issuer's discretion. These options do not align with the standard mechanism of floating-rate bonds.
5. Conclude the correct answer: The coupon of a floating-rate bond adjusts periodically based on changes in a reference interest rate, such as LIBOR, ensuring the bond's interest payments reflect current market conditions.