- Floating rate note
Floating rate notes (FRNs) are bonds that have a variable coupon, equal to a
money market reference rate, like LIBORor federal funds rate, plus a spread. The spread is a rate that remains constant. Almost all FRNs have quarterly coupons, i.e. they pay out interest every three months, though counter examples do exist. At the beginning of each coupon period, the coupon is calculated by taking the fixing of the reference ratefor that day and adding the spread. A typical coupon would look like 3 months USD LIBOR +0.20%.
In the U.S.,
government sponsored enterprises (GSEs) such as the Federal Home Loan Banks, the Federal National Mortgage Association(Fannie Mae) and the Federal Home Loan Mortgage Corporation(Freddie Mac) are important issuers. In Europe the main issuers are banks.
Some FRNs have special features such as maximum or minimum coupons, called capped FRNs and floored FRNs. Those with both minimum and maximum coupons are called collared FRNs.
FRNs can also be obtained synthetically by the combination of a
fixed rate bondand an interest rate swap. This combination is known as an Asset Swap.
FRNs carry little
interest rate risk. An FRN has a duration close to zero, and its price shows very low sensitivity to changes in market rates. When market rates rise, the expected coupons of the FRN increase in line with the increase in forward rates, which means its price remains constant. Thus, FRNs differ from fixed rate bonds, whose prices decline when market rates rise.
As FRNs are almost immune to interest rate risk, they are considered conservative investments for investors who believe market rates will increase. The risk that remains is
Securities dealers make markets in FRNs. They are traded over-the-counter, instead of on a
stock exchange. In Europe, most FRNs are liquid, as the biggest investors are banks. In the US, FRNs are mostly held to maturity, so the markets aren't as liquid. In the wholesale markets, FRNs are typically quoted as a spread over the reference rate.
Suppose a new 5 year FRN pays a coupon of 3 months LIBOR +0.20%, and is issued at par (100.00). If the perception of the credit-worthiness of the issuer goes down, investors will demand a higher interest rate, say LIBOR +0.25%. Therefore, a dealer would then make a market of 27 / 25. This means, that he would buy bonds at the equivalent of LIBOR +0.27%, and sell at the equivalent of LIBOR +0.25%. If a trade is agreed, the price is calculated. In this example, LIBOR +0.27% would be roughly equivalent to a price of 99.65. This can be calculated as par, minus the difference between the coupon and the price that was agreed (0.07%), multiplied by the maturity (5 year).
Inverse floating rate note
Wikimedia Foundation. 2010.
Look at other dictionaries:
floating rate note — see note Merriam Webster’s Dictionary of Law. Merriam Webster. 1996. floating rate note … Law dictionary
floating-rate note — ( FRN) A medium term instrument with a coupon rate that floats up or down based upon changes to an index or reference rate. Often, FRNs are tied to LIBOR. American Banker Glossary ( FRN) note whose interest payment ( interest payments) varies… … Financial and business terms
floating rate note — ( FRN) A bond which pays a floating rate of interest. The rate of interest payable on the bond will be reset at regular intervals, for example, each three months or six months. Dresdner Kleinwort Wasserstein financial glossary * * * floating rate … Financial and business terms
floating-rate note — FRN A eurobond with a floating rate interest, usually based on the London Inter Bank Offered Rate. They first appeared in the 1970s and are usually issued as negotiable bearer bonds. A perpetual FRN has no redemption. A capped FRN is one with a… … Accounting dictionary
floating-rate note — FRN A eurobond with a floating rate interest, usually based on the London Inter Bank Offered Rate They first appeared in the 1970s and have a maturity of between 7 and 15 years. They are usually issued as negotiable bearer bonds. A perpetual FRN… … Big dictionary of business and management
Floating Rate Note — Anleihe mit variabler Verzinsung; Floater (fachsprachlich) … Universal-Lexikon
Floating-rate note (FRN) — Note whose interest payment varies with short term interest rates. The New York Times Financial Glossary … Financial and business terms
Floating-Rate Note - FRN — A note with a variable interest rate. The adjustments to the interest rate are usually made every six months and are tied to a certain money market index. Also known as a floater . These protect investors against a rise in interest rates (which… … Investment dictionary
Floating Rate Note (FRN) — ⇡ Anleihe mit variabler Verzinsung und einer Laufzeit zwischen fünf und zehn Jahren. Die Verzinsung wird regelmäßig, i.d.R. halbjährlich abhängig von einem ausgewählten Geldmarktzins (⇡ Referenzzinssatz) festgelegt. Dazu kommt ein von der Bonität … Lexikon der Economics
Inverse floating rate note — An inverse floating rate note, or simply an inverse floater, is a type of bond or other type of debt instrument used in finance whose coupon rate has an inverse relationship to short term interest rates (or its reference rate). With an inverse… … Wikipedia