Floating rate note
Floating rate notes, or floaters, are characterised by the fact that they have interest rates that are adjusted to current interest rate levels on a regular basis (every three, six or twelve months). The issuer determines the reference rate and in some cases a spread ahead of time and notifies investors of these conditions.
The borrower's credit rating is a key factor in determining the spread. The lower the rating, the wider the spread. The terms and conditions of the bond issue may provide for the spread to be adjusted in the event of a change in the issuer's credit rating.
Floating rate notes are particularly attractive for the issuer during periods of falling interest rates as the interest rates are adjusted to market conditions and the debt servicing costs thereby fall each time there is a drop in the interest rate level. The converse applies for the investor: a fixed-income bond is more advantageous during periods of falling interest rates.