Floating Interest Rate

What is a 'Floating Interest Rate'

A floating interest rate is an interest rate that is allowed to move up and down with the rest of the market or along with an index. This contrasts with a fixed interest rate, in which the interest rate of a debt obligation stays constant for the duration of the agreement.

A floating interest rate can also be referred to as a variable interest rate because it can vary over the duration of the debt obligation.

BREAKING DOWN 'Floating Interest Rate'

For example, residential mortgages can be obtained with a fixed interest rate, which is static and can't change for the duration of the mortgage agreement, or with a floating interest rate, which changes periodically with the market. In the case of floating interest rates in mortgages, and most other floating rate agreements, the prime lending rate is used as a basis for the floating rate, with the agreement stating that the interest rate charged to the borrower is the prime interest rate plus a certain spread.

RELATED TERMS
  1. Floating Rate Fund

    A mutual fund that invests in financial instruments with a variable ...
  2. Fixed Interest Rate

    An interest rate on a liability, such as a loan or mortgage, ...
  3. Bond Market Association (BMA) Swap

    A type of swap arrangement in which two parties agree to exchange ...
  4. Drop Lock

    An arrangement whereby the interest rate on a floating rate note ...
  5. Float

    Money in the banking system that is briefly counted twice due ...
  6. Floating Price

    The leg of a swap that is based on a fluctuating interest rate. ...
Related Articles
  1. Trading

    Managing Interest Rate Risk

    Interest rate risk stems from the possibility that an interest-bearing asset’s value will change due to changing interest rates.
  2. ETFs & Mutual Funds

    FLOT: iShares Floating Rate Bond ETF

    Explore detailed analysis and information of the iShares Floating Rate Bond ETF, and learn how to use this ETF as a defense against rising interest rates.
  3. ETFs & Mutual Funds

    Is it Time to Buy Floating Rate Bonds?

    The Fed’s awaited interest rate hike could finally be at hand. Are floating rate bonds the way to go?
  4. Investing

    Calculating Floating Stock

    Floating stock is the number of shares a company has available for trade in the open market.
  5. Investing

    Floating Stock

    Floating stock is the number of a company’s shares that are available for the public to buy and sell.
  6. Trading

    Understanding the Floating Exchange Rate

    Floating exchange rate is the exchange rate between two currencies at any given time.
  7. Investing

    Interest Rate Swaps Explained

    Plain interest rate swaps that enable the parties involved to exchange fixed and floating cash flows.
  8. Managing Wealth

    Watch Your Duration When Rates Rise

    While recent market volatility is leading investors to look for the nearest exit, here are some suggestions for bond exposure in attractive sectors.
  9. Trading

    Managing Interest Rate Risk

    Learn which tools you need to manage the risk that comes with changing rates.
  10. Managing Wealth

    Ideas for Your Bond Portfolio When Rates Rise

    It has been nearly 10 years since the Fed last raised interest rates, and though the central bank didn’t hike rates this month, they look to be coming.
RELATED FAQS
  1. What does floating stock tell traders about a particular stock?

    Learn about what floating stock tells a trader about a particular stock. One commonality of the biggest winners in stock ... Read Answer >>
  2. Which of the following strategies is (are) appropriate? I. If a borrower has a fixed ...

    The correct answer is: a) (II) is incorrect because if an investor has floating rate assets and is expecting interest rates ... Read Answer >>
  3. How can an investor reduce interest rate risk?

    Learn about the different ways investors can reduce interest rate risk. Locking in interest rates increases certainty for ... Read Answer >>
  4. Why does float usually increase at the beginning of the week?

    Find out more about float and how checking float is created in the American banking system. Learn more about why the Federal ... Read Answer >>
  5. How does float affect the nation's money supply?

    Learn how float affects the appearance of the nation's money supply, and receive a brief lesson on how the U.S. government ... Read Answer >>
  6. What is the difference between holdover float and transportation float?

    Find out about float, which may become a thing of the past due to the steady decline of check writing and new services in ... Read Answer >>
Hot Definitions
  1. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  2. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  3. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  4. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  5. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  6. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
Trading Center