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CIB0292_ADB2727 Floating Rate
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INVESTMENT
INVESTMENT SOLUTIONS
Floating Rate Notes
A Floating Rate Note (FRN) is a medium-term bond that ■ Convenience – Coupons are periodically reset,
provides investors with the ability to achieve returns at eliminating the inconvenience of continuously rolling
a fixed margin above a floating benchmark, generally the short dated securities.
90 day Bank Bill Swap Rate (BBSW). The main issuers ■ Liquidity – The Commonwealth Bank is a major
of FRNs are Banks, Building Societies, Credit Unions and participant in an active and efficient secondary market
Corporates. FRNs can provide investors with a higher and will endeavour to make a price to repurchase any
yield than other securities of comparable credit quality. stock sold to an investor (subject to credit limits).
FRNs are generally for more sophisticated investors with ■ Parcel size – The minimum investment parcel is
$500,000 or more to invest and who understand the $500,000 and in multiples of $100,000 thereafter.
nature and risk profile of the Floating Rate Note issuer. ■ Flexibility – A wide range of terms is available, usually
FRNs are a fixed, medium-term investment with terms between one and five years.
ranging from one to five years. The Commonwealth Bank
■ Safe custody – The Commonwealth Bank will hold
maintains a large FRN portfolio with a wide variety of
your notes on a safe custody basis free of charge.
issuers to suit investors’ needs.
■ Fees – Bank fees are not applicable.
“I am seeking a medium-term Are Floating Rate Notes for you?
investment that pays a rate FRNs may be a suitable investment if:
at a fixed margin above a ■ You have $500,000 or more to invest.
■ You require a medium-term investment.
floating benchmark.”
■ You are seeking higher returns.
Key benefits of Floating Rate Notes ■ You fully understand the nature and risk profile
of the Floating Rate Note issuer.
■ Enhanced returns – FRNs pay a fixed margin above
a market benchmark rate, usually the 90 day BBSW. Credit ratings
BBSW rates are compiled daily by the Australian
The credit rating of an issuer is determined by a ratings
Financial Markets Association (AFMA) using the mid-
agency, such as Moody’s or Standard and Poor’s.
rates of fourteen banks. This margin (Quoted Margin)
The credit rating represents the ability of the issuer to
is determined on the issue date by the credit rating
repay the principal of the investment at maturity.
of the issuer, the term to maturity and the market
The Commonwealth Bank does not guarantee FRNs and
perception of the issuer.
therefore the investor must be comfortable with the credit
■ Diversification – The Commonwealth Bank maintains
rating of the issuer.
a broad portfolio of issuers with varying credit ratings
allowing an investor to spread their credit risk across
a wide range of institutions.
Pricing Contact us
The price of a FRN at any given time is dependent upon For more information please call the Global Markets office
three factors: in your State or refer to your relationship manager.
■ Quoted Margin (QM): established on the issue date,
this plus the benchmark rate provides the yield for the
current coupon period;
■ Trading Margin (TM): reflects the current market value
of the FRN; and
■ market perception of the issuer.
The capital value of the FRN changes as the difference
between the QM and the TM changes. When the TM is
higher than the QM the capital value of the FRN is less
than the face value and is said to be trading at a discount.
When the TM is less than the QM the capital value of the
FRN is higher than the face value and is said to be trading
at a premium. When the two margins are equal it is said to
be trading at par.
As the capital value fluctuates a capital gain or loss
is possible if the FRN is traded prior to maturity.
However, there is no capital loss if the security is held
to maturity.
Typically FRNs trade at a premium as time to maturity
decreases. However, they can trade at a discount if the
credit outlook for the issuer changes or the credit rating
is downgraded.
Example of coupon calculation
FRN face value $1,000,000
BBSW on reset date 5.00% pa
Issue margin 0.60% pa
Next reset date 90 days
Coupon = $1,000,000 x
(5.00% + 0.60%) x (90/365)
= $13,808.22
The information contained in this brochure is made available for persons who are wholesale clients as defined in the Corporations Act 2001.
Financial markets’ products contain an element of risk: the level of risk varies depending on the product’s specific attributes and how it is used. The Bank will
enter into transactions on the understanding that the customer has: made their own independent decision to enter into the transaction; determined that the
transaction is appropriate; ensured they have the capacity to evaluate and understand the terms, conditions and risks, and is not relying on any communication
from the Bank as advice.
Issued by:
Commonwealth Bank of Australia
ABN 48 123 123 124
ADB2727
1203
