BOND MATH: The Theory Behind the Formulas

Floating-Rate Notes in General

Interest payments on a standard floating-rate note adjust from period to period to reflect changes in a money market reference rate. The market for floaters started in the 1970s when interest rates began to rise due to “inflation creep,” as it was called back then. Fixed-income bonds, which were seen to be boring compared to the excitement of the stock market, finally became interesting. Interest in bonds arose because conservative, buy-and-hold investors experienced losses, at least in terms of market value, when yields to maturity went up. Floaters, first issued by commercial banks, were offered to investors as a way of “preserving capital value,” meaning that they transferred interest rate risk from market value ...