Floating Rate Bond
Quick Definition
A bond whose coupon rate adjusts periodically based on a reference interest rate, providing protection against rising rates.
What Is Floating Rate Bond?
A floating rate bond (also called a floater or variable rate bond) has a coupon rate that resets periodically — typically every 1 to 3 months — based on a reference rate such as SOFR (Secured Overnight Financing Rate), the Federal Funds Rate, or the prime rate, plus a fixed spread. For example, a floater paying SOFR + 2% would yield 6.5% when SOFR is 4.5%, but only 4% if SOFR drops to 2%. This reset mechanism provides natural protection against rising interest rates because the coupon increases as rates rise, keeping the bond's price near par value. This is the opposite of fixed-rate bonds, which lose value when rates increase. Floating rate bonds have very low duration (typically 0-0.25 years) regardless of their maturity, making them attractive in rising rate environments. Common issuers include banks, corporations, and governments. Floating rate notes (FRNs) issued by the U.S. Treasury have become popular since their introduction in 2014. The primary risk of floaters is that income decreases when rates fall.
Floating Rate Bond Example
- 1A corporate floater paying SOFR + 1.5% yields 5.8% when SOFR is 4.3% — if SOFR rises to 5%, the yield automatically adjusts to 6.5%
- 2U.S. Treasury floating rate notes (FRNs) reset weekly based on the 13-week T-bill rate, with durations near zero
Related Terms
Coupon Rate
The annual interest rate stated on a bond, expressed as a percentage of face value, that determines the periodic coupon payments.
Duration
A measure of a bond's price sensitivity to interest rate changes, expressed in years, indicating how much the price will move for a 1% change in rates.
Duration Risk
The risk that changes in interest rates will cause significant fluctuations in bond prices, with longer-duration bonds facing greater price volatility.
Bond Yield
The return an investor earns from a bond, expressed as an annual percentage, which can be measured in several ways including current yield and yield-to-maturity.
Bond
A fixed-income debt security where investors loan money to an issuer in exchange for regular interest payments and return of principal at maturity.
Treasury Bond (T-Bond)
A long-term U.S. government debt security with a maturity of 20 or 30 years, paying semiannual coupon interest.
Expand Your Financial Vocabulary
Explore 130+ financial terms with definitions, examples, and formulas
Browse Bonds & Fixed Income Terms