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Floating-rate note is a type of coupon bonds, payments on which are variable and are not determined until the end of the instrument’s circulation period. All other characteristics of this type of bonds and their possible types are similar to securities with a fixed coupon.
There are the following types of bonds with floating interest rates:
The main advantage of floating rate bonds for both the issuer and the investor is the ability to improve borrowing conditions for the former or investment conditions for the latter in case of favorable changes in market conditions. Floating coupon bonds are largely insured against high interest rate volatility. As interest rates rise, floating coupon securities do not decline as much in price as fixed coupon securities.
On the other hand, floating rate bond issuance is associated with less predictability of returns for the investor and difficulty in calculating investment results, as well as uncertainty in the cost of debt service for the issuer. The latter increases the risk of default on bonds.
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