DEFINITION of 'Floater'

A floater is a bond or other type of debt whose coupon rate changes with market conditions (short-term interest rates).

A floater is also known as floating-rate debt.


A floater is a fixed income security that makes coupon payments that are tied to a reference rate. The coupon payments are adjusted following changes in the prevailing interest rates in the economy. When interest rates rise, the value of the coupons is increased to reflect the higher rate. Possible reference or benchmark rates include the London Interbank Offer Rate (LIBOR), Euro Interbank Offer Rate (EURIBOR), federal funds rate, US Treasury rates, etc. For example, a floater bond may have the coupon rate set at "3-month T-bill rate plus 0.5%." If the perception of the creditworthiness of the issuer turns negative, investors may demand a higher interest rate at, say 3-month T-bill rate plus 0.75%.

A floater lies in contrast to a fixed-rate note, which pays the same interest rate for its entire maturity. Because floaters are based on short-term interest rates, which are generally lower than long-term rates, a floater typically pays lower interest than a fixed-rate note of the same maturity.

A floater is more beneficial to the holder as interest rates are rising because it allows a bondholder to participate in the upward movement in rates since the coupon rate of the bond will be adjusted upwards. For this reason, floaters carry lower yields than fixed notes of the same maturity as investors may be willing to accept a lower initial rate in exchange for the possibility of a higher rate if market rates rise. Conversely, a floater is less advantageous to the holder when rates are decreasing because the rate at which they will receive interest declines.

A government or corporate issuer may pay coupons on a floater monthly, quarterly, semi-annually, or annually. The coupon payments are unpredictable, although the security may have a cap and a floor, which allows an investor to know the maximum and/or minimum interest rate the note might pay. A cap is the maximum interest rate that the note can pay, regardless of how high the benchmark rate climbs, and a floor is the lowest allowable payment. A floater’s interest rate can change as often or as frequently as the issuer chooses, from once a day to once a year. The reset period tells the investor how often the rate adjusts.

One type of floater that may be issued is called the inverse floater. The coupon rate on an inverse floater varies inversely with the benchmark interest rate. The coupon rate is calculated by subtracting the reference interest rate from a constant on every coupon date. When the reference rate goes up, the coupon rate will go down since the rate is deducted from the coupon payment. A higher interest rate means more is deducted, thus, less is paid to the debtholder. Similarly, as interest rates fall, the coupon rate increases because less is taken off. To prevent a situation whereby the coupon rate on the inverse floater falls below zero, a restriction or floor is placed on the coupons after adjustment. Typically, the floor is set at zero.

  1. Inverse Floater

    An inverse floater is a bond or other type of debt whose coupon ...
  2. Deleveraged Floater

    A fixed-income instrument with a floating coupon rate that is ...
  3. Super Floater

    A floating-rate collateralized mortgage obligation (CMO) tranche ...
  4. Coupon Rate

    Coupon rate is the yield paid by a fixed income security, which ...
  5. Unscheduled Property Floater

    An insurance product that is added to an existing policy and ...
  6. Jewelry Floater

    An optional addition to a homeowners insurance policy that protects ...
Related Articles
  1. Investing

    Comparing Yield To Maturity And The Coupon Rate

    Investors base investing decisions and strategies on yield to maturity more so than coupon rates.
  2. Personal Finance

    6 Sneaky Ways Coupons Make You Spend More

    If you're hoping to save money by using coupons, watch out for sellers' strategies.
  3. Investing

    The Pros & Cons Of Using Coupons For Your Business

    Coupons can drive business to your store – you just need to make sure it's profitable business. Here are strategies that work.
  4. Personal Finance

    6 Tricks To Make Coupons Work For You

    Use these strategies to counteract the stores' and manufacturers' coupon tactics and come out ahead.
  5. Personal Finance

    Is Coupon Clipping A Waste Of Time?

    Coupons reduce the cost of a product or service, but are the savings really worth the time it takes?
  6. Financial Advisor

    Present Value Of Different Bond Types Using Excel

    To determine the value of a bond today - for a fixed principal (par value) to be repaid in the future - we can use an Excel spreadsheet.
  7. Investing

    Understanding Bond Prices and Yields

    Understanding this relationship can help an investor in any market.
  8. Personal Finance

    The Top 6 Online Coupons And How To Use Them

    Learn the basics of couponing so that you can get creative with your savings strategy and evolve beyond the basic coupon book.
  1. What is the most common solvency ratios used in fundamental analysis?

    Learn about the difference between a bond's coupon rate and its yield rate, how the coupon rate influences market price and ... Read Answer >>
  2. How do debit spreads impact the trading of options?

    Find out what it means when a bond has a coupon rate of zero and how a bond's coupon rate and par value affect its selling ... Read Answer >>
  3. When is a bond's coupon rate and yield to maturity the same?

    Find out when a bond's yield to maturity is equal to its coupon rate, and learn about the components of bonds and how they ... Read Answer >>
  4. How do I calculate yield to maturity in Excel?

    Learn how to calculate a bond's yield to maturity in Microsoft Excel, which is one of the best methods of comparing bonds ... Read Answer >>
Hot Definitions
  1. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  2. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  3. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  4. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
  5. Annuity

    An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income ...
  6. Restricted Stock Unit - RSU

    A restricted stock unit is a compensation issued by an employer to an employee in the form of company stock.
Trading Center