what is a floating rate note frn 
a floating rate note frn is a debt instrument with a variable interest rate the interest rate for an frn is tied to a benchmark rate benchmarks include the u s treasury note rate the federal reserve funds rate known as the fed funds rate the london interbank offered rate libor or the prime rate floating rate notes or floaters can be issued by financial institutions governments and corporations in maturities of two to five years investopedia zoe hansenunderstanding floating rate notes frns floating rate notes frns make up a significant component of the u s investment grade bond market compared with fixed rate debt instruments floaters allow investors to benefit from a rise in interest rates since the rate on the floater adjusts periodically to current market rates floaters are usually benchmarked against short term rates like the fed funds rate which is the rate the federal reserve bank sets for short term borrowing between banks typically the rate or yield paid to an investor on a bond or u s treasury product rises with the length of time until maturity the rising yield curve compensates investors for holding longer term securities in other words the yield on a bond with a 10 year maturity should pay under normal market conditions a higher yield than a bond with a two month maturity as a result floating rate notes usually pay a lower yield to investors than their fixed rate counterparts because floaters are benchmarked to short term rates the investor gives up a portion of the yield for the security of having an investment that rises as its benchmark rate rises however if the rate of the short term benchmark falls so too does the rate on the frn there s no guarantee that the frn s rate will rise as fast as interest rates in a rising rate environment it all depends on the performance of the benchmark rate as a result an frn bondholder can still have interest rate risk meaning the bond s rate underperforms the overall market since the bond s rate can adjust to market conditions an frn s price tends to have less volatility or price fluctuations traditional fixed rate bonds typically slide when rates rise because existing bondholders are losing out by holding a product returning a lower rate frns avoid some of the market price volatility since there s less opportunity cost for the bondholders in a rising rate market as with any bond frns are susceptible to default risk which occurs when the company or government can t pay back the principal or original amount that was paid by the investor since floaters have variable rates they tend to have unpredictable coupon payments a coupon payment is the interest payment for a bond sometimes a floater may have a cap and a floor which allows an investor to know the maximum and minimum interest rates paid by the note an frn s interest rate can change as often or as frequently as the issuer chooses from once a day to once a year the reset period which is outlined in the bond s prospectus tells the investor how often the rate adjusts the issuer may pay interest monthly quarterly semiannually or annually callable floating rate note vs non callable floating rate notefrns may be issued with or without a callable option which means the issuer has the right to return the investor s principal amount and stop making interest payments the callable feature is known upfront and allows the issuer to pay off the bond before maturity floating rate notes allow investors to benefit from rising rates as the frn s rate adjusts to the marketfrns are impacted less by price volatilityfrns are available in u s treasuries and corporate bondsfrns may still have interest rate risk if market rates rise to a greater extent than the rate resetsfrns can have default risk if the issuing company or corporation can t pay back the principalif market interest rates fall the frn rates may fall as wellfrns typically pay a lower rate than their fixed rate counterpartsexample of a floating rate note frn the u s treasury department began issuing floating rate notes in 2014 the notes have the following characteristics and requirements 