What characteristic defines variable interest rate bonds?

Variable interest rate bonds, also known as floating rate bonds, are characterized by an interest rate that may change periodically. This adjustment typically aligns with a benchmark interest rate, such as LIBOR or the U.S. Treasury rate, leading to varying interest payments over the life of the bond. As interest rates rise or fall in the market, the coupon payments on variable interest rate bonds will also increase or decrease correspondingly, allowing investors to benefit from higher rates and potentially mitigating interest rate risk.

The option stating that the interest rate remains fixed refers to fixed-rate bonds, which do not offer the same adjustment potential and can pose a greater risk if prevailing rates rise. The option that suggests the bond pays no interest describes zero-coupon bonds, which do not make periodic interest payments. Lastly, bonds issued at a premium are sold above their face value, independent of whether the interest rate is fixed or variable. Therefore, the defining characteristic of variable interest rate bonds is indeed that the interest rate may change periodically.