Also floating rate note (FRN). It is a note bearing a variable interest rate which is usually readjusted every six months or so. This rate is typically referenced to a money market index such as LIBOR or federal funds rate, plus a specific “fixed” spread. Almost all floaters pay quarterly coupons. At the beginning of each coupon period, the coupon is determined by adding the spread to the fixing of the reference rate at that time. For example, a floater may have a coupon of 3-month LIBOR + 30 basis points.
Floaters are primarily used to protect investors against upward movements in interest rates.
