Newsletter Subscribe
Enter your email address below and subscribe to our newsletter
Table of Contents
What is a Floating Rate Note (FRN)?
A Floating Rate Note (FRN) represents a debt instrument with an interest rate that adjusts periodically based on a reference benchmark rate. Unlike fixed-rate bonds, FRNs provide variable interest payments that move in line with prevailing market rates.
Definition
Floating Rate Note (FRN) is a debt security that pays interest at a variable rate, typically linked to a benchmark such as SOFR, LIBOR (historically), or a central bank policy rate.
Key Takeaways
- Interest payments fluctuate with benchmark interest rates.
- FRNs reduce interest rate risk compared to fixed-rate bonds.
- Commonly issued by governments, banks, and corporations.
Understanding Floating Rate Notes
Floating rate notes are designed to protect investors from rising interest rates. Because the coupon rate resets at regular intervals (monthly, quarterly, or semi-annually), the bond’s income adjusts as market rates change.
An FRN’s interest payment consists of a reference rate plus a spread that reflects the issuer’s credit risk. When benchmark rates increase, coupon payments rise; when rates fall, payments decrease.
FRNs are widely used in institutional portfolios, money market funds, and bank funding structures where interest rate flexibility is important.
Formula (If Applicable)
FRN Coupon Rate:
Coupon Rate = Reference Rate + Credit Spread
Interest Payment:
Interest Payment = Principal × Coupon Rate × Time Period
Real-World Example
A bank issues a floating rate note paying SOFR + 1.5%, with quarterly resets. If SOFR rises from 3% to 4%, the coupon rate increases from 4.5% to 5.5%, boosting investor income.
Importance in Business or Economics
Floating rate notes are important because they:
- Help investors manage interest rate risk
- Support bank and corporate funding flexibility
- Transmit changes in monetary policy through debt markets
They are particularly attractive during periods of rising or volatile interest rates.
Types or Variations
Government FRNs: Issued by sovereigns with variable coupons.
Corporate FRNs: Issued by companies for flexible-rate financing.
Bank FRNs: Used for wholesale funding and capital instruments.
Related Terms
- Fixed Income Security
- Benchmark Rate
- Interest Rate Risk
Sources and Further Reading
- Bank for International Settlements (BIS)
- U.S. Treasury – Floating Rate Notes
- CFA Institute – Fixed Income Analysis
Quick Reference
- Variable-rate debt instrument.
- Coupon resets based on benchmark rates.
- Lower duration risk than fixed-rate bonds.
Frequently Asked Questions (FAQs)
Are FRNs safer than fixed-rate bonds?
They reduce interest rate risk but still carry credit risk.
How often do FRN rates reset?
Typically monthly, quarterly, or semi-annually.
Do FRNs benefit from rising rates?
Yes, coupon payments generally increase as rates rise.
