Floating Rate Notes

Business.com / Finances / Last Modified: February 22, 2017

Floating Rate Notes are simply investment vehicles that have interest rates that fluctuate approximately every six months. At that ...

Floating Rate Notes are simply investment vehicles that have interest rates that fluctuate approximately every six months. At that time, the interest rate resets to equal the short-term interest rate plus a specific percent that was determined when the floating rate b-note was issued. The floating rate notes list of benefits to investors include: (1) they protect against interest rate hikes and (2) they have higher yields than fixed bonds.

Floating rate notes are structures similar to adjustable-rate mortgages, except a floating rate note is not a type of loan; it’s a type of investment. Having a floating rate note is similar to investing in a money market or fixed annuity. Simply defined as bonds with variable interest rates, floating rate notes coupons directly relate to a specific short-term interest rate. Consider the following key characteristics of floating rate notes to determine if these notes are a wise investment choice for your business.

1. Floating rate notes have little interest rate risk.

2. A company or government entity can issue floating rate notes.

3. Notes tend to have maturities of approximately five years.

Know the risk of floating rate notes

The price of floating rate notes is the risk. This risk is highly associated with the maturity rate and issuer credit quality. Therefore, interest rate increases are more beneficial to the note holder than interest rate decreases.

Seek professional advice on floating rate notes

With a floating rate note, investors can achieve a higher yield than with other securities. Floating rate notes are generally beneficial to investors who have $500,000 or more to invest. An attorney or other investment professional can advise you on the advantages and disadvantages of floating rate notes.

Consult with a floating rate notes provider

The floating rate notes list of benefits includes higher returns, flexibility, diversification and convenience. If you're seeking higher more profitable returns, desire a medium-term investment vehicle and understand the risks involved, you may find floating rate notes to be advantageous for you.
  • The price of floating rate notes depends on the quoted margin, which is set on the date of issue, the trading margin, which demonstrates the floating rate notes' current market value and the issuer's perception of market conditions. Floating rate notes can trade at a discounted price, if the issuer's perception changes.

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