Floating Rate Notes

These are ordinary bonds but where the coupon level on the bond changes, and thiis moves in line with some particular measure of the market rate of interest.

The rate it moves in line with is usually LIBOR or LIMEAN.

So there will be two elements to the coupon of the bond, therefore, the first of these will be the index rate and the other will be the quoted margin, which is the rate above the index rate that must be paid.

There are also other possible conditions to be aware of when it comes to the bonds.

One of these is called a drop lock bond, which is simply where the coupon can float but when it gets to a set minimum, it locks into being a fixed coupon bond at the interest rate (minimum) hence its name of a drop lock.

Related Articles

Expectations theory of the yield curve
Spot Rate and Bonds
Why Market Inefficiencies are Interesting
The Price Arbitrage Method
Convertible Gilts Explained
Getting a Water Meter Fitted

More Stocks and Shares Articles