how a floating rate fund works
although there is no formula to calculate a floating rate fund there can be various investments that comprise a fund floating rate funds can include preferred stock corporate bonds and loans that have maturities from one month to five years floating rate funds can include corporate loans and mortgages as well floating rate loans are loans made by banks to companies these loans are sometimes repackaged and included in a fund for investors floating rate loans are similar to mortgage backed securities which are packaged mortgages that investors can buy into and receive an overall rate of return from the numerous mortgage rates in the fund floating rate loans are considered senior debt meaning they have a higher claim on a company s assets in the event of default however the term senior doesn t represent credit quality only the pecking order of claiming a company s assets to pay back the loan if the company defaulted floating rate funds can include floating rate bonds which are debt instruments whereby the interest paid to an investor adjusts over time the rate on a floating rate bond can be based on the fed funds rate which is the rate set by the federal reserve bank however the return on the floating rate bond is typically the fed funds rate plus a set spread added to it as interest rates rise so does the return on the floating rate bond fund 