Floating-Rate Bonds: Switching One Risk for Others
5 Pages Posted: 12 Sep 2015
Date Written: May 2014
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
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