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.

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RELATED FAQS
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    Learn about what floating stock tells a trader about a particular stock. One commonality of the biggest winners in stock ... Read Answer >>
  2. 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 >>
  3. 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 >>
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