A floating rate note (FRN) is a debt instrument whose coupon payments reset at regular intervals to reflect movements in a reference rate (such as SOFR or LIBOR) plus a fixed spread. The principal is usually repaid at maturity, and the coupon varies with the reference rate.
FRNs are issued by corporations, banks, municipalities, and other borrowers to obtain shorter-term funding and to provide investors with cash flows that adjust with prevailing interest rates. The adjustable coupons can help reduce reinvestment risk when short-term rates rise, compared with fixed-rate bonds. The spread is set at issuance and remains constant for the life of the note, while the reference rate can change at each reset date (quarterly, semiannually, etc.).
An FRN’s price typically trades near its face value when the reference rate expectations align with prevailing rates; its yield reflects the current reset rate plus the spread. While rate resets mitigate some interest-rate risk, credit risk, liquidity risk, and issuer-specific risk remain. FRNs can be more sensitive to changes in the credit environment and changes in the liquidity of the market.
A 3-year FRN issued by a corporate issuer pays a quarterly coupon equal to the three-month SOFR plus 0.50 percentage points, with principal repaid at maturity.
Bond · Coupon · Reference rate · SOFR · LIBOR · Credit risk · Maturity