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Floating rate securities

Floating rates

Characteristics of interest rate securities

Yield evaluation

Coupon stripping

Exercise

Summary

 

File: MFMaths3e_06.xls

FLOATING RATES

Floating rate securities are fixed income instruments which have a coupon rate or interest rate that varies based on a short-term rate index. Other terms are floating rate notes, floating rate certificates of deposit or variable rate notes. While this is more complex than fixed coupons, floating rates are generally advantageous for lenders when interest rates are rising, since they mitigate some of the risks.

Floating rate securities assume that the investor’s return is a coupon linked to an index which will change during the life of the security. The index could be quarterly ...

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