Floating-Rate Bonds: Switching One Risk for Others

5 Pages Posted: 12 Sep 2015

Date Written: May 2014

Abstract

Unlike traditional bonds, Floating-rate bonds (FRB) do not have a fixed rate coupon. Instead, their rate fluctuates or floats based on the market plus a spread. As a result, FRBs tend to be less vulnerable to interest-rate fluctuations. Many believe FRBs can help preserve principal, while offering above-average yields — especially if rates rise. The primary benefits of FRBs seem compelling, but there are risks: credit risk, liquidity risk, concentration risk and valuation risk. In this paper, we address each.

Keywords: floating-rate bonds, FRB, FRB funds, credit risk, liquidity risk, concentration risk, valuation risk

JEL Classification: G10, G11, G20, G23, G30

Suggested Citation

Institute, Brandes, Floating-Rate Bonds: Switching One Risk for Others (May 2014). Brandes Institute Research Paper No. 2014-03. Available at SSRN: https://ssrn.com/abstract=2659411 or http://dx.doi.org/10.2139/ssrn.2659411

Brandes Institute (Contact Author)

Brandes Investment Partners ( email )

11988 El Camino Real, Suite 500
P.O. Box 919048
San Diego, CA 92191-9048
United States

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