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

Floaters can protect investors, because they pay more when interest rates rise -- unlike fixed-rate bonds which lose value when rates rise -- thereby reducing the interest rate risk that comes with a fixed-rate bond purchase. Floaters also protect investors from inflation and volatility. However, if interest rates go down, a floater will pay its investors less. Floaters also offer an uncertain income stream, and if issued by a corporation, they carry corporate default risk, as well.

Floater interest rates reset periodically, ranging from once a day to once a year. The rates are tied to a benchmark, such as the federal funds rate or LIBOR (the rate at which many international banks charge each other for loans). Floaters usually have a two-to-five-year term to maturity, and they pay quarterly.

Floaters are normally intended for large institutional investors. Individuals can purchase them through a broker, or through mutual funds and exchange-traded funds that invest in floating-rate securities.

Financial institutions and governments typically issue floaters. The U.S Treasury began issuing floaters in January 2014 to expand its borrowing options.

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