Loading the player...

What is a 'Floating-Rate Note - FRN'

A floating rate note, also known as a floater or FRN, is a debt instrument with a variable interest rate. A floating rate note’s interest rate, since it is not fixed, is tied to a benchmark such as the U.S. Treasury bill rate, LIBOR, the fed funds or the prime rate. Floaters are mainly issued by financial institutions and governments, and they typically have a two- to five-year term to maturity.

BREAKING DOWN 'Floating-Rate Note - FRN'

FRNs make up a significant component of the U.S. investment-grade bond market, and they tend to become more popular when interest rates are expected to increase. Compared to fixed-rate debt instruments, floaters protect investors against a rise in interest rates. This is because interest rates have an inverse relationship with bond prices, and the market price a fixed-rate note will drop if interest rates increase. For this reason, however, FRNs carry lower yields than fixed notes of the same maturity. They also have unpredictable coupon payments, although the note sometimes has a cap and/or a floor, which allows an investor to know the maximum and/or minimum interest rate the note might pay.

An FRN'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. The issuer may pay interest monthly, quarterly, semiannually or annually. FRNs may be issued with or without a call option.

One major FRN issuer is Fannie Mae. Its FRNs have different reference rates, including three-month T-bills, the prime rate, fed funds rate, one-month LIBOR and three-month LIBOR. Commercial banks, state and local governments, corporations and money market funds purchase these notes, which offer a variety of terms to maturity and may be callable or non-callable.

Examples of an FRN

The most common type of FRN is one issued by the federal government. For example, the U.S. government announced on July 21, 2016, that it would issue $15 billion worth of 2-year FRNs. The notes are to become available on July 27, 2016.

However, the government is not the only type of entity that can offer such notes. For example, Guaranty Bancorp, a community-bank holding company based in Denver, Colorado, completed a $40 million offering of fixed-to-floating rate notes on July 18, 2016. The notes carry a fixed annual rate of 5.75% until July 20, 2021. After that date, the notes are to carry a quarterly floating rate equal to three-month LIBOR as determined by the specific quarterly period, plus 4.73%. This means that the reset period is quarterly. The payments are expected to be paid out annually.

RELATED TERMS
  1. Floater

    A bond or other type of debt whose coupon rate changes with market ...
  2. Deleveraged Floater

    A fixed-income instrument with a floating coupon rate that is ...
  3. LIBOR Flat

    An interest rate benchmark used to establish the floating interest ...
  4. Reference Rate

    An interest rate benchmark upon which a floating-rate security ...
  5. Super Floater

    A floating-rate collateralized mortgage obligation (CMO) tranche ...
  6. Commercial Property Floater

    A specific type of floater that is attached to an insurance policy. ...
Related Articles
  1. Investing

    What are Floating-Rate Notes?

    A floating-rate note is a debt instrument with an interest rate that “floats,” or varies. They are also called floaters.
  2. Investing

    Another Idea for Rising Rates Protection

    Floating-rate notes can help investors fight rising interest rates.
  3. Insights

    What Is The Relationship Between The Federal Funds, Prime And LIBOR Rates?

    The prime rate and LIBOR rate, two of the most prominent benchmark rates, tend to track the federal funds rate closely over time. However, during periods of economic turmoil, LIBOR appears more ...
  4. 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.
  5. Insights

    What Is ICE LIBOR And What Is It Used For?

    In the case of ICE LIBOR, an innocent-sounding set of letters has a profound bearing on every loan you make.
  6. Investing

    How Do Interest Rates Affect the Stock Market?

    Interest rates can have a complicated ripple effect through financial markets. Here's what you need to know.
  7. Managing Wealth

    Managing Interest Rate Risk

    You need certain tools to manage the risk that comes with changing rates.
  8. Investing

    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.
  9. Investing

    PIMCO’s Mutual Fund for Investment Grade Bonds (PTTRX)

    Explore the complicated and often arcane makeup of the PIMCO Total Return Fund, and identify the fund's management style and top five holdings.
RELATED FAQS
  1. How does LIBOR compare to the Federal Reserve rate as an accurate indicator?

    Explore a comparison of the predictive efficacy of the Federal Reserve's fed funds rate and the Intercontinental Exchange's ... Read Answer >>
  2. How did LIBOR come into use?

    Learn about the significance of the London Interbank Offered Rate, or LIBOR, and the history of how the daily LIBOR became ... Read Answer >>
  3. Where on the internet can I find LIBOR rate information?

    Learn what the LIBOR is, which website provides general LIBOR information and which website provides ICE LIBOR data going ... Read Answer >>
  4. Why is LIBOR sometimes referred to as LIBOR ICE?

    Learn what the LIBOR rate is, why there was a change in administration from BBA to IBA, and why LIBOR is often referred to ... Read Answer >>
  5. What's the difference between bills, notes and bonds?

    Treasury bills (T-Bills), notes and bonds are marketable securities that the U.S. government sells in order to pay off maturing ... Read Answer >>
  6. How do interest rates affect a bond's coupon rate?

    Find out how the changes in the national interest rate affect the coupon rates of newly issued bonds and why coupon rates ... Read Answer >>
Hot Definitions
  1. Salvage Value

    The estimated value that an asset will realize upon its sale at the end of its useful life. The value is used in accounting ...
  2. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  3. Promissory Note

    A financial instrument that contains a written promise by one party to pay another party a definite sum of money either on ...
  4. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  5. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  6. Absolute Advantage

    The ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost ...
Trading Center