floater

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Floater

A bond whose interest rate varies with the interest rate of another debt instrument, e.g., a bond that has the interest rate of the Treasury bill +.25%.

Fairway Bond

A bond with a coupon that is linked to some short-term benchmark interest rate. That is, a fairway bond carries a variable interest rate that changes according to a specified short-term interest rate. For example, a fairway bond may have a coupon of LIBOR + 0.5%. When investors believe interest rates will soon rise, they have an incentive to stay out of the bond market because their return would be locked at the lower interest rate. Fairway bonds reduce this incentive by allowing investors to take advantage of higher interest rates as they occur. A fairway bond is also called a floater. See also: Inverse floater.

Floating-Rate Note

A bond with a variable interest rate. These bonds typically have coupons renewable every three months and pay according to a set calculation. For example, a note may have an interest rate of "EURIBOR + 1%" and pay whatever the EURIBOR rate happens to be at the time plus 1%. Some FRNs have maximum and minimum interest rates, known as capped FRNs and floored FRNs, respectively. An FRN with both a maximum and a minimum interest rate is called a collared FRN. In the United States, government sponsored enterprises issue most FRNs while banks do the same in Europe. See also: Adjustable-rate mortgage.

floater