Floating rate notes (FRNs) are becoming increasingly attractive to investors as interest rates rise. Unlike fixed-rate bonds, FRNs offer coupon payments that adjust periodically based on a benchmark interest rate, such as LIBOR or the federal funds rate.

This feature provides a hedge against rising interest rates. When benchmark rates increase, the coupon payments on FRNs also increase, helping to maintain their value. This contrasts with fixed-rate bonds, which can decline in value when interest rates rise.

Benefits of Floating Rate Notes

• Protection against rising rates: FRNs offer a built-in mechanism to adjust to changing interest rate environments.
• Stable value: The adjustable coupon payments help to maintain the value of FRNs, even when interest rates are volatile.
• Diversification: FRNs can be a valuable addition to a diversified investment portfolio.

Considerations

While FRNs offer several advantages, it’s important to consider the following:

• Credit risk: As with any debt instrument, FRNs carry credit risk, which is the risk that the issuer may default on its obligations.
• Interest rate floors: Some FRNs may have interest rate floors, which limit the extent to which coupon payments can decline if benchmark rates fall.

In conclusion, floating rate notes can be a useful tool for investors seeking to protect their portfolios from the negative effects of rising interest rates. However, it’s important to carefully consider the risks and rewards before investing in FRNs.