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Floating Rate Bonds

Floating rate bonds have a variable interest rate, rather than a fixed interest rate, which is pegged to a well-known benchmark such as the US Treasury Bill and adjusted periodically.

Corporate floating rate bonds usually pay out their coupons every six months, like normal bonds. On the day that the coupon is paid out, called the reset date, the interest rate is adjusted or "reset" to match the bond's benchmark. Some floating rate bonds are sold with only half of their coupon as floating rate and the other half fixed, which is called the spread. In this case, the coupon is calculated by simply adding the adjusted part of the coupon to the spread.

Floating rate bonds are considered a fairly safe investment, since they offer some protection against interest rate risk. When interest rates rise, floating rate bond prices remain fairly stable since they will reflect the new interest rate as soon as the reset date comes around. On the other hand, if the bond's benchmark interest rate drops steadily over time, then those who seek income from their bond investments may be frustrated and look on high fixed-rate bonds longingly.

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