Floating Rate Notes Key Terms

Review basic terms involved in managing floating rate notes

By Jennifer Ehlenfeldt, Freelance Writer

The 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.

Reset period

The reset period is the amount of time set between interest rate adjustments. Floating rates can be reset daily, weekly, monthly, quarterly, semiannually or annually.
Try: Investing In Bonds explains the reset period and how it works with floating rate notes.

Collateralized mortgage obligations

Collateralized mortgage obligations, CMOs, are a type of floating rate note mortgage-based security.
Try: RiskGlossary.com explains the collateralized mortgage obligation and how it works as a floating rate note.

Fixed monthly payments

A 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.
Try: Easy Peasy explains the fixed monthly payment and how it is affected by a flat or fixed interest rate.

Interest rate floor and cap

The 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.
Try: NationMaster.com explains the difference between the interest rate floor and interest rate cap.

Bond

A 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.
Try: Read the definition of bond at Finra Investors.

Floating interest rate and fixed interest rate

The 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.
Try: Sorted.org defines floating interest rate and fixed interest rate and explains how both work.