Floating Rate Note (FRN)
A debt security whose coupon rate resets periodically based on a reference benchmark rate, providing protection against rising interest rates.
What is Floating Rate Note?
A floating rate note (FRN), also called a floater, is a bond whose coupon rate is not fixed but resets periodically—typically quarterly—based on a short-term benchmark rate plus a fixed spread (margin). Common benchmarks include SOFR (Secured Overnight Financing Rate, the replacement for LIBOR), the Fed Funds rate, or EURIBOR. For example, an FRN might pay SOFR + 150 basis points, so if SOFR is 5.00%, the coupon for that period is 6.50%. Because coupons reset with market rates, FRNs have minimal interest rate risk and tend to maintain prices close to par as rates change—making them attractive in rising-rate environments. The U.S. Treasury issues FRNs with 2-year maturities.
Example
In 2022–2023, as the Federal Reserve raised the federal funds rate from near zero to over 5%, investors in fixed-rate bonds suffered significant price losses. By contrast, holders of SOFR-linked FRNs saw their quarterly coupons rise in lockstep with the benchmark rate, collecting 5%+ annual yields while their bond prices remained near par—demonstrating the rate-protection advantage of floating-rate structures.