Floating-rate note

A floating-rate note is a bond whose coupon is not fixed at issuance but instead resets periodically based on a reference interest rate, plus a fixed spread set when the bond is issued. As the reference rate moves up or down, typically every three or six months, the note's coupon payment adjusts along with it.

This structure largely removes interest rate risk from the bond's price. Because the coupon adjusts to reflect current rates, a floating-rate note's price stays close to par value even as broader interest rates change, unlike a fixed-rate bond, whose price can swing significantly when rates move. The tradeoff is that a floating-rate note's income is unpredictable in dollar terms going forward, an investor does not know exactly what future coupon payments will be, only the formula that determines them.

Floating-rate notes are attractive to investors who are more worried about rising rates than about locking in a fixed return, since their income rises along with rates rather than being stuck at an old, lower level. They are also common in certain areas of corporate lending and structured products, where a floating coupon better matches the variable nature of the underlying cash flows being financed.