Can someone please confirm the below, what is the correct answer?
When you purchase a floating rate bond, that is receive floating rate coupon payments, do you want the interest rate to go up (so you get a higher yield) but at the same time the price of the bond goes down. Or do you want the interest rate to go down (so you get a lower yield) but at the same time the price of the bond goes up.
When you issue a fixed rate bond, that is make fixed payments, you want the interest rate to go up, but bond price goes down. Or do you want the interest rate to go down, but bond price goes up?
Floating rate bonds resets its rates, so the price is (when simplified, because technically and exam wise you must take this into consideration - the period between the resets) not affected by interest rates moving.
Fixed rate, assuming i bought it, I want the interest rates to go down. I end up holding a bond paying me higher than the market, which means it is more valuable than a par bond.
Long is the position of the buyer/holder/investor.
When you buy a floating rate bond, you are being paid floating rate coupons, so you want the interest rate to go up. Floating rate bonds trade at par on payment dates because the coupon matches the prevailing interest rate, so the ups and downs of the interest rate doesn’t affect the price of the bond, just how much coupon you get paid.
When you issue a fixed rate bond, you pay fixed rate that’s set at the beginning, so it really doesn’t impact you if interest rates go up or down, unless the bond has some kind of call or put feature. Of course the market vaue of the bond will change, so if you have bought that fixed rate bond, then you want the interest rate to go down, so that your bond will be worth more.
The short is always the person selling (i.e. in the case of you issuing a bond) and the long is the person buying.
Thanks for the responses. So with a fixed rate bond, assuming we bought it, you want interest rates to go down, and prices to go up. Does this mean you are long the bond and short the interest rate?