Floating coupon Bonds are Bonds which do not have fixed coupon rate. This means that its interest rate will fluctuate or vary as per the market interest rates. The coupon resets at pre determined intervals periodically. Floating coupon will have a base rate plus an added spread.
What is a Floating Coupon?
Floating rate or coupon is reset periodically with reference to a benchmark reference rate. This base rate may be based on MIBOR (Mumbai Inter Bank Offer Rate), T- Bill Yield, Commercial Paper Yield etc.
Features of Floating coupon Bonds
- This bond helps the issuer to hedge loss which is caused due to interest rate fluctuations.
- It protects the investors from risk of falling market
- Variable coupon bonds also protects the investors from falling interest rates
- These bonds always have fixed spread or mark up over variable portion to make them attractive for the investors.
- When interest rates rise , investor benefits as his income increases
- However if the interest rates fall, it is advantageous to the borrower as he incurs lower interest costs
- Floating rate bonds are issued at cap or floor, where cap specifies maximum interest payable, while floor refers to minimum interest receivable
- These are efficient debt management instruments which reduces refinancing risk.
