Floating Rate Bonds – why buy them?
Bond or Debt obligations with coupon payments that are floating in nature are referred to as floating rate bonds. Issuers of these bonds are no different from those for fixed rate bonds i.e. government, government sponsored enterprises, private financial institutions, corporates et al. Bank Loans that are priced on a variable benchmark are also of the nature of floating rate debt. A floating rate coupon typically references a known market benchmark index and has a spread component (quoted in basis points) i.e. sum of the benchmark index yield and spread form the floating rate coupon. In case of the US treasury floating rate note – product introduced in 2013 - the reference benchmark is the 13-week treasury bill yield – while for floating interest payments on US corporate bonds reference the treasury bond itself along with a credit spread. The spread typically determined at the new issuance/initial auction, stays constant through the re-issuance of the bond. ...