Floating rate note - Definition and Overview

Floating-rate notes (FRNs), are debt securities that, as bonds do, entitle the owner to regular interest payments or 'coupons'. While the owner of a bond is entitled to fixed interest rate payments, FRN coupons are reset periodically to match a standard money market rate such as the London interbank offered rate or a US Treasury Bill. Typically the rate agreed is the benchmark rate plus an additional spread and is reset every 3 or six months.

FRNs are generally issued by corporations wishing to raise funds from capital markets. In the U.S.A. government agencies such as the Federal Home Loan Banks and Fannie Mae and Freddie Mac are important issuers. Some FRNs may have special characteristics defined by the issuer such as maximum or minimum coupons, or the adoption of a fixed rate at a specified time in the future. FRN's are typically bought by investors who expect rising interest rates.

FRNs can be used to balance risks incurred through other interest rate instruments in an investment portfolio. For example, a bond that pays a fixed rate coupon will lose value if interest rates rise, but the value of an FRN will be less sensitive to interest rate changes as its coupon moves in step with other interest rates changes, for better or for worse.

FRNs are traded over the counter and have limited liquidity; typically they are purchased and then held to maturity.

See also

• Financial instruments