Floating rate bond
Also called: FRB · Topic: Financial Markets, Instruments, Insurance and Pensions · NCERT: Beyond NCERT
Meaning
A floating rate bond (FRB) is a bond whose coupon (interest payment) is not fixed. It is reset from time to time in line with a benchmark rate. When market rates rise, the coupon rises too. This protects the holder from much of the price fall that hits fixed-coupon bonds when rates go up.
Example
The Government of India issues Floating Rate Bonds whose coupon is reset in line with the 182-day T-bill yield. If the T-bill yield goes up, the next coupon on these FRBs also goes up.
Don't confuse with
- Inflation-indexed bond: its principal or coupon is adjusted for inflation, which protects the investor's real return. An FRB is linked to a market interest rate, not to inflation.
- Fixed-coupon bond: it pays the same coupon until maturity, so its price falls more sharply when rates rise.
Related concepts
- Bonds
- Coupon rate
- Present value
- Bond price and interest rate inverse relation
- Capital gain
- Zero-coupon bond
- Mark-to-market
- Yield curve
- Inverted yield curve
- Credit rating