Floating Rate Note [FRN]

Floating Rate Notes (FRNs) have variable interest rates that reset periodically based on reference rates like SOFR (Secured Overnight Financing Rate), Treasury bills, or prime rate. For example, an FRN might pay SOFR + 150 basis points, reset quarterly. If SOFR is 5%, the note pays 6.5% that quarter. This structure provides protection against rising rates – as rates increase, so do coupon payments. FRNs have very low duration risk, with prices remaining relatively stable despite rate changes. They’re popular when rates are expected to rise or during uncertain rate environments. However, FRNs offer no benefit if rates fall and credit spread risk remains. Common issuers include banks (matching floating-rate assets), corporations, and government agencies. The U.S. Treasury began issuing 2-year FRNs in 2014. Reset frequencies vary from daily to annually, with quarterly being common. FRNs trade near par value except during credit concerns about the issuer.