Floating Rate Note (FRN)

A floating rate note (FRN) is a type of debt security whose interest rate is linked to an underlying reference rate, such as the London Interbank Offered Rate (LIBOR). This means that the interest rate on the FRN will fluctuate up or down in line with changes in the reference rate.

FRNs are often issued by corporations and governments as a way to raise funds at a lower interest rate than they would be able to obtain with a fixed-rate bond. This is because the floating rate on an FRN is typically lower than the fixed rate on a comparable bond.

However, FRNs also carry more risk than fixed-rate bonds, because the interest rate on an FRN can increase over time, which could lead to higher payments for the investor.

There are two main types of FRNs:

• Straight FRNs: These FRNs pay a fixed coupon rate that is based on the reference rate. The coupon rate is reset at regular intervals, such as every six months or every year.
• Capped FRNs: These FRNs pay a coupon rate that is capped at a certain level. This means that the interest rate on the FRN will never exceed the cap, even if the reference rate increases.

FRNs can be a good investment for investors who are looking for a higher yield than they would be able to obtain with a fixed-rate bond. However, FRNs also carry more risk, so investors should carefully consider their investment objectives and risk tolerance before investing in FRNs.

Here are some additional details about floating rate notes:

• FRNs are typically issued with maturities of one to five years, but they can be issued with maturities of up to 30 years.
• The reference rate used for FRNs can be any number of different rates, such as LIBOR, the U.S. Treasury bill rate, or the euro interbank offered rate (EURIBOR).
• FRNs are often issued in denominations of $1,000 or more.
• FRNs can be traded on the secondary market, just like any other type of bond.

Floating rate notes can be a good investment for investors who are looking for a higher yield than they would be able to obtain with a fixed-rate bond. However, FRNs also carry more risk, so investors should carefully consider their investment objectives and risk tolerance before investing in FRNs.