Floating Rate Note

A Floating Rate Note (FRN) is a debt security that has a variable Interest Rate, which is typically tied to a Benchmark rate, such as LIBOR or the U.S. Treasury Bill rate. The interest payments on an FRN fluctuate at specified intervals, usually quarterly or semi-annually, based on changes in the Benchmark rate. This makes FRNs less sensitive to Interest Rate risk compared to fixed-rate Bonds, as their payments adjust to prevailing market rates.

Examples of Floating Rate Notes include:

• Corporate FRNs: Issued by companies to raise Capital, these notes might be tied to LIBOR, adjusting every three months.
• Government FRNs: Issued by governments, such as the U.S. Treasury’s Treasury Inflation-Protected Securities (TIPS), which can have Floating rates linked to inflation rates.

Cases where FRNs are beneficial:

• During rising Interest Rate environments, investors may prefer FRNs as their yields increase with the Benchmark rates.
• Investors looking for protection against inflation might opt for FRNs that are Indexed to inflation rates.