Floating Rate Note (FRN)

What is Floating Rate Note (FRN)?

A Floating Rate Note (FRN) is a debt instrument or a bond that gives variable interest rather than a fixed rate. The interest rate is revised periodically against a benchmark rate, such as LIBOR, SOFR, or MIBOR in India.

Purpose

FRNs are designed to:

• Protect investors against rising interest rates
• Provide flexible returns that move with the market
• Help companies or governments borrow money at competitive rates

How It Works?

• The bond’s interest (also called the coupon) is reset at regular intervals (e.g., every 3 or 6 months).
• The new rate is usually calculated as:
  Benchmark Rate + Spread
  (Spread is a small extra percentage to reward investors.)
• So, if the benchmark goes up, your interest earnings go up too.

Importance in Investing

• FRNs are attractive when interest rates are expected to rise.
• They offer more protection against inflation compared to fixed-rate bonds.
• They add diversity to an investment portfolio.

Pros

1. Interest income rises with market rates
2. Lower price volatility compared to fixed-rate bonds
3. Attractive for conservative and institutional investors

Cons

1. Returns can fall if interest rates drop
2. Complex structures can confuse new investors
3. Often offer lower yields initially compared to fixed-rate bonds