Floating Rate Notes Key Terms
Review basic terms involved in managing floating rate notesThe floating rate note is an investment tool with fluctuating interest options usually based on the fluctuation in the interest index for a given period of time. The notes, sometimes called floaters, allow for investment protection when rates spike or drop dramatically in a short period of time.
Keep interest rates, reset periods and bond options in mind when considering floating rate notes. Learn the basic terms when dealing with floating rate notes so you can put your money in a higher yield investment with knowledge that you've made a solid decision.
Collateralized mortgage obligationsCollateralized mortgage obligations, CMOs, are a type of floating rate note mortgage-based security.
Fixed monthly paymentsA fixed monthly payment is a scheduled payment of the same amount each month. With a floating note, the fixed payment is still usually the same because lenders calculate payments then adjust capital owed each month to make up the difference in rates.
Interest rate floor and capThe interest rate cap is a shortened term of the European rate option called caplets. Buyers receive money if the maturity rate exceeds the cap set on the bond. An interest rate floor is short for the floorlets. Buyers of floor rates get money if the rate falls below the agreed fixed floor price.
BondA bond is a debt agreement between investors and issuing agencies such as corporations or government entities. The issuer agrees to pay face value and interest at a specific date or regular intervals.
Floating interest rate and fixed interest rateThe floating interest rate and fixed interest rate are two types of interest options. The floating rate changes with the interest index over time, while the fixed rate is based on interest at the time of the loan and set at a specific amount.
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