Floating interest rates

A floating rate is an interest rate that will change over time in line with a benchmark rate.

A floating rate is usually fixed at a fixed premium in percentage points (or basis points) above a market rate such as LIBOR, a particular bank's declared base rate or a central bank's official base rate.

A wide variety of debt instruments pay floating rates.

In contrast, fixed income interest rates do not change over time. If a £100 bond pays 10% fixed interest it will pay £10 every year.

A security that pays interest at a floating rate will have lower interest rate risk than a similar security that pays fixed interest. This is because the coupon payments rise together with the discount rate.

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