What is a floating rate note?
A floating rate note (FRN) is a type of debt instrument that pays periodic interest at a rate that is periodically adjusted based on a benchmark interest rate, such as the London Interbank Offered Rate (LIBOR). The interest rate on an FRN is typically reset at regular intervals, such as every 3 months, and the coupon payment is determined by multiplying the benchmark rate by the face value of the note. As a result, the interest payment on an FRN will vary based on changes in the benchmark rate.
a bond that pays different amounts of interest at different times, depending on the rate that exists on the date the payment is made
Floating rate notes (FRNs) are bonds that have a variable coupon, equal to a money market reference rate, like LIBOR or federal funds rate, plus a quoted spread (also known as quoted margin). The spread is a rate that remains constant. Almost all FRNs have quarterly coupons, i.e. they pay out interest every three months. At the beginning of each coupon period, the coupon is calculated by taking the fixing of the reference rate for that day and adding the spread.A typical coupon would look like 3 months USD LIBOR +0.20%.
What are floating rate notes used for?
FRNs are often used as an alternative to fixed-rate bonds, which pay a fixed rate of interest for the life of the bond because they allow the issuer to benefit from declining interest rates. They are also often used by investors who want to hedge against interest rate risk or who are looking for a more flexible investment option.
FRNs are traded in the secondary market, much like fixed-rate bonds. The value of an FRN can be influenced by changes in interest rates, as well as changes in credit risk, and other factors that can affect the perceived risk of the issuer.
Different types of floating rate notes
There are different types of FRNs, and the specific terms and conditions of an FRN will depend on the issuing company and the market conditions at the time of issuance.