A structured note (FRN) that pays a floating interest rate referenced to a popular market rate such as LIBOR. Each floating interest rate depends on the previous interest rate paid. This note has an adjustable cap, adjustable floor, or both that move hand in hand with each new reset rate. In other words, it is combined with a ratchet option that pays a high floating coupon on the condition that the coupon neither will exceed a fixed amount from the previous coupon level nor will fall below the previous coupon. Initially, the note has a high coupon that adjusts with market rate developments over time. Effectively, the investor is long the note and short a path-dependent or periodic cap and/ or long a path-dependent or periodic floor.

This structure allows the note holder to receive a high coupon floor when he harbors a feeling that rates may move upward or downward much more slowly than implied by the forward curve. However, the note will disappointingly underperform if rates move upward (especially in case the structure has a knock-out feature that puts a cap or knock-out level on its coupon).

The ratchet FRN is also known as a ratchet floater , a one-way “collared” floater (one-way floating-rate note), or a sticky floater.