Cap risk - Immunization risk

[prodigal]

Hello All,
This is regarding Cap risk in 2015 Schweser Book 3 Pg 33. I simply cannot wrap my head around this sentence. “If the coupon on the floating rate bond doesn’t adjust upward in response to rising interest rates, the market value of the bond will adjust downward”.
Why should the coupon rise as interest rates rise? Why then should market value decrease as interest rates rise?

 

[S2000magician]

prodigal wrote:Hello All,
This is regarding Cap risk in 2015 Schweser Book 3 Pg 33. I simply cannot wrap my head around this sentence. “If the coupon on the floating rate bond doesn’t adjust upward in response to rising interest rates, the market value of the bond will adjust downward”.
Why should the coupon rise as interest rates rise?

It’s a floating-rate bond.
It’s in their nature. Like the scorpion.

prodigal wrote:Why then should market value decrease as interest rates rise?

If the coupon is capped so that it doesn’t rise, then the YTM will be less than the coupon, so the price will fall, just like a fixed-coupon bond.