Floating-rate note.

In plain English

A floating-rate note, or FRN, is a bond with a variable coupon: instead of a fixed rate, its interest resets on a schedule, often quarterly, based on a reference rate plus a set spread. When market rates rise, its payments rise too, and when they fall, so do its payments. Because the rate adjusts, an FRN's price stays much steadier than a fixed-rate bond when interest rates move, which is its main appeal. The tradeoff is unpredictable income and, usually, a lower starting yield than a comparable fixed-rate bond in a normal market.

01Why it matters

Floating-rate notes hold their value better than fixed bonds when rates rise, so understanding them helps you see one tool for reducing interest-rate risk in a bond portfolio.

02The math, step by step

A floating-rate note pays a benchmark rate plus 0.5 percent, resetting quarterly. If the benchmark rises from 4 to 5 percent, the note's coupon climbs from 4.5 to 5.5 percent, and its price barely moves, unlike a fixed bond that would fall.

03What this is NOT

04Receipts

Every figure on this page is sourced to a primary document. Tap to open the original.