What is a Floating Rate Note?
Definition: A Floating Rate Note is a bond without fixed interest coupons like a Straight-Bond. Instead the interest coupon is subject to the level of a reference-interest-rate like LIBOR, EURIBOR or Swap-Rates. A Floating Rate Notes pays the reference-rate plus a little premium according to the credit quality of the debtor.
The big advantage of a Floating Rate Note is, that the investors always gets a fair interest inline with the market. Hence an investor has no risk of changing interests; if the interests move up, he will get a higher coupon too. Floating Rate Notes are recommendable when interests go up. However, if interests move down, the investor gets a lower coupon and would be better of with a Fixed-Coupon-Bond.
Example of a Floating-Rate-Note:
Debtor: Deutsche Bank AG (subordinated)
Lifespan: 09.03.2005 - 09.03.2017
Interest-Rate: 3-month-Euribor-Rate + 0.76%
In the prospectus one can find the terms of this bond. In this example the interest is payed 4 times a year: 9th of March, June, September and December. Relevant is the level of the official EURIBOR-3-m-Rate. Additionally the investors get a premium of 0.76%. If the 3m-Euribor is at 1%, the coupon would be 1.76%.
Characteristics of a Floating Rate Note:
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