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.
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.
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
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.
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.
Interest income rises with market rates
Lower price volatility compared to fixed-rate bonds
Attractive for conservative and institutional investors
Returns can fall if interest rates drop
Complex structures can confuse new investors
Often offer lower yields initially compared to fixed-rate bonds