A floating-rate note (FRN) in which coupons are based on the prime rate. Prime is a short-term, floating rate of interest that banks use in pricing loans to their most creditworthy commercial customers. This rate is a benchmark against which other rates are usually measured and often keyed. Note structurers sometimes prefer prime note to LIBOR-linked notes on the grounds that prime has a relative advantage over LIBOR-referenced rates in a falling rate environment (this assumed feature is known as prime stickiness, i.e., prime falls when LIBOR falls, but at a gradual pace). Another advantage lies in the fact that the prime rate has a daily, weighted reset mechanism, which is particularly advantageous in a rising rate environment. In such a setting, this mechanism allows prime note holders to participate in the increasing rate gains on a daily basis.
A prime FRN is also known as a prime floater.
Comments