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Various types of floating rate notes

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Floating interest rate note (FRN) or floater is a long-term debt security whose yield is usually
tied to a market benchmark interest rate (often it is the interbank interest rate such as PRIBOR,
LIBOR or EURIBOR).

And is determined at regular intervals (usually at three or six months). These variable rates are
attributable to a fixed rate which compensates for higher risk compared with the interbank
market, which is listed on the issue conditions.

In a situation where the reference interest rates are rising, bonds are advantageous for the
investor and disadvantageous for the issuer. When the benchmark interest rates fall, the
opposite is true.

There are different types of floating rate notes, and these include:

 - Plain floater: increases the interest rate whenever interest rates rise. Typically the investor
profits from rising interest rates.
 - Money market floater: interest rate is tied to a money market interest rate.
- Capital market floater: interest rate is tied to a capital market interest rate
- Mixed floaters: debt instruments with initial fixed after a certain time followed by a floating
rate or vice versa.

- Cap floater: the interest rate is restricted to a specified maximum rate, the sum of the
reference rate cannot exceed this rate and spread.
- Floor floater: variable rate bonds with a minimum rate of return. If it falls below the reference
rate, then the investor is entitled to interest payments in the amount of the minimum.
- Minimax-floater: variable rate bonds with a minimum and maximum rate of interest. If the
reference rate falls below or exceeds a spread minimum or maximum rate below, the investor is
entitled to interest payments in the amount of the minimum or the interest rate remains limited to
this maximum rate. Collars are a combination of cap and floor floater.

- Reverse floaters are debt securities with fixed maturity, which follows the variable interest rate
from the difference between an arbitrary set (high) interest rate and a reference rate (eg
LIBOR). This includes a cap, so the buyer does not pay to the issuer, if the reference rate rises
too far. Investors benefit from falling interest rates.
- Flip-flop floaters provide the issuer the right to a long-term debt in a short turn.
- Miss match floaters are floating rate instruments, which break at repricing date and the
reference rate.

FRNs prices show a very low sensitivity to changes in market interest rates. When market
interest rates increase, the expected coupon payments will increase, meaning that bond prices
are unchanged. This is one of the differences from the bonds with fixed interest rate, the price
decreases when market interest rates rise and vice versa. Since FRNs are almost immune to
interest rate risk, they are considered conservative investments for investors who expect a rise
in market interest rates.

				
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