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. Reverse Floater

    A floating-rate note in which the coupon rises when the underlying ...
  2. Deleveraged Floater

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

    A security, generally a bond, which has a leverage factor of ...
  4. Reset Margin

    The difference between the interest rate of a security and the ...
  5. Floating Interest Rate

    An interest rate that is allowed to move up and down with the ...
  6. LIBOR

    LIBOR or ICE LIBOR (previously BBA LIBOR) is a benchmark rate ...
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. Insights

    Who Uses Libor Data And Why?

    LIBOR is a crucial benchmark reference rate with global economic impact.
  3. Investing

    Another Idea for Rising Rates Protection

    Floating-rate notes can help investors fight rising interest rates.
  4. Personal Finance

    An Introduction To LIBOR

    This influential rate is published daily in Britain, and felt all around the world.
  5. 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.
  6. 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.
  7. Personal Finance

    How Interest Rate Cuts Affect Consumers

    Traders rejoice when the Fed drops the rate, but is it good news for all? Find out here.
  8. 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.
  9. Financial Advisor

    Rising Rates: What It'll Mean for Stocks and Bonds

    A look at what rising interest rates could mean for the equity and bond markets.
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 is Libor determined?

    Libor is the major rate used to price debt stock. Libor is actually a set of several benchmarks that reflect the average ... Read Answer >>
  3. How can LIBOR be used as an economic indicator?

    Learn how the LIBOR is used, how it is calculated and how it can be used with Treasury bill rates to gauge the health of ... Read Answer >>
  4. 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 >>
Hot Definitions
  1. Covariance

    A measure of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns ...
  2. Liquid Asset

    An asset that can be converted into cash quickly and with minimal impact to the price received. Liquid assets are generally ...
  3. Nostro Account

    A bank account held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts ...
  4. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
  5. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
  6. Inverse Transaction

    A transaction that can cancel out a forward contract that has the same value date.
Trading Center