A CMO tranche in which the monthly coupon rate is typically set equal to a reference rate such as LIBOR. A floating-rate tranche is mainly designed to attract investors who prefer to buy variable rate securities. For example, the rate on a floating-rate tranche (FR tranche) may be set to LIBOR plus 40 basis points, with a maximum rate of 9%. A floating-rate tranche earns interest that is linked to an interest rate index which could be a collateral pool of floating-rate mortgages (which produces a series of variable rate payments that can be passed on to floating rate tranches).
Floating-rate tranches can be structured so that their rates move even at a higher pace than the underlying index does (e.g., twice or thrice the floating rate, and so on). Also, these tranches can have a preset upper and lower limit.
A floating-rate tranche is also known as a floater tranche.
