Floating rate note

A floating rate note (FRN) is a form of security, invented in the euromarkets and adopted elsewhere, that carries a variable interest rate which is adjusted regularly (at one to six-monthly intervals – whatever is preferred by the issuer) by a margin against a benchmark rate such as LIBOR (the London Inter-Bank Offered Rate of Interest).

Issued for three years or longer, FRNs are popular during periods of increased volatility in interest rates, when lenders may be reluctant to lend funds cheaply at a fixed period for a fixed rate.

For example, the issuer might agree that their FRN will pay 50 basis points (0.5%) over the rate of LIBOR. So if LIBOR was 6% over a six-month period (it is usually worked out as an average), the FRN would pay 6% plus the 0.5% spread, or 6.5% in total over the next six months.

A straight, or ‘vanilla’, eurobond would carry a fixed rate of interest regardless of LIBOR. One variation is an inverse FRN. Interest payments on these rise as interest rates fall, and vice versa.

Merryn

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