Benefits of Floating Rate Notes 

What are the benefits of floating rate notes or floater?

Value in a Rising Interest Rate Environment

An investor who believes interest rates are on the rise may not want to commit to a current fixed rate for the long term investment.

Conversely, short term inertness rates may also not meet an investor’s expectations.

Floating rate notes or floaters offer an ideal alternative as they generally pay a spread above current short term interest rates as well as offer the benefit of future increases in the benchmark.

If interest rates rise for example, the investor will receive a coupon payment higher then the original coupon.

Manage Interest Rate Risk

While a fixed rate corporate bond will trade down in price as interest rates rise, a floating rate bond tied to interest rates typically does not react as strongly to interest rate variations because the coupon changes in sync with interest rates.

As a result, floating rate notes or floaters will not appreciate as much as fixed rate bonds in a declining interest rate environment, however, in a rising interest rate environment should out perform fixed rate corporate bonds.

Floating rate notes or floaters give investment variety

Floating rate notes or Floaters are available in a variety of maturities, issuers, credit quality and coupons. Therefore, they give investment variety for diversification.