What are the different types of Floating Rate Notes?

Answer 1

1. Callable FRNs

These are FRNs where the issuer has the option of calling back the notes and pay off the principal outstanding along with applicable interest at any time during the note tenure. Company's usually do this if the prevailing market rates are very low. They can call back their existing FRN and issue fixed rate bonds at the prevailing low interest rates. Such an action by the note issuer is a disadvantage to the investor

2. Capped FRNs

These are FRNs that have a cap to the maximum interest/coupon payment that would be made out by the note issuer

3. Floored FRNs

These are FRNs that have a set minimum interest/coupon payment that would be made out by the note issuer

4. Collared FRNs

These are FRNs that are a combination of both capped and floored FRNs. Here the minimum and the maximum interest rate payable is fixed and usually the coupon payments done to the investors varies between the set range.

5. Reverse or Inverse FRNs

These are FRNs where the coupon payment moves in a direction opposite to the set benchmark rates. If the market interest rates rise, the coupon payment falls. Similarly if the market interst rates fall, the coupon payment rises.

6. Stepped FRNs

These are FRNs where the coupon payment rate is set or reset many times during the life of an FRN. For ex: a company can say that it would pay the below coupon:

Year 1 - Benchmark rate + 50 basis points

Year 2 & 3 - Benchmark rate + 75 basis points

Year 4 - Benchmark rate

Year 5 - Benchmark rate + 50 basis points

Here, though the coupon amount is going to vary every year, the investor can clearly predict the amount that he would receive from the note issuer.