Floating rate notes

Welcome and thank you for joining today's session on floating rate notes. Floating rate notes, often called FRNs are a type of bond where the interest or coupon payment changes over time. Unlike traditional fixed rate bonds, the coupon rate on an FRN is periodically adjusted based on a benchmark rate, such as lib, sofa or Eurobor plus a fixed margin. This feature allows FRNs to adapt to market interest rate changes, making them attractive instruments for investors seeking flexibility and some protection against rising rates. To begin, we will explore how FRNs are structured and the basics of their functionality. FRNs are typically issued by governments, financial institutions, and corporations. When an investor purchases an FRN they lend money to the issuer who in return promises regular interest payments. The key distinction is that these payments are not constant. At set intervals, often every three or six months, the coupon is recalculated according to the prevailing reference rate. For example, if the reference rate increases, the next coupon payment also increases. The margin or spread is fixed at issuance and reflects the issuer's credit risk above the benchmark. This structure results in variable returns for investors while providing issuers with a broader investor base. Floating rate notes offer several advantages. They provide investors with a hedge against rising interest rates since the returns adjust accordingly.