**BUK**RG 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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