Corporate Bonds

Posts Tagged ‘risks floating rate notes’

Risks of Floating Rate Notes #1: Interest Rate Risk

While the market value of Floating Rate Notes or floaters are relatively insensitive to changes in interest rates, the income received are, highly dependent upon the level of the reference rate over the life of the Floating Rate Notes investment.

Total return of Floating Rate Notes may be less than anticipated if future interest rate expectations are not met.

Risks of Floating Rate Notes #2: Credit Risk

Credit risk involves the scenario in which the issuer will be unable to meet its payment obligations.

Credit ratings serve as a measure of the issuer's financial health and should be taken into account when considering a purchase of floaters.

In addition, because the spread paid in excess of the reference rate is determined in part by the issuer's credit rating, changes in this credit rating can also affect the market value of the investment.

Risks of Floating Rate Notes #3: Call Risk

If a callable floater is called by the issuer prior to maturity, the investor may be unable to reinvest funds in another floater with comparable terms.

If the floater is not called, the investor should be prepared to hold it until maturity.