Definition
FRNs have coupons that adjust with market interest rates, typically resetting quarterly based on SOFR or another benchmark rate plus a fixed spread. Because the coupon adjusts, FRN prices remain near par value, providing natural protection against rising interest rates. The spread reflects the issuer's credit risk.
functions Formula
Coupon = Reference Rate + Fixed Spread
lightbulb Example
An FRN pays SOFR + 150 basis points, resetting quarterly. If SOFR is 4.0%, the coupon is 5.5%. Next quarter SOFR rises to 4.5%, coupon resets to 6.0%.
verified_user Key Points
- Coupon adjusts with market rates
- Near-zero interest rate duration
- Spread reflects issuer's credit quality
- Natural hedge against rising rates