In today’s current climate of low to even negative interest rates, investors are seeking new ways to stay ahead of inflation and earn interest on their investments while avoiding dangerous pitfalls in unknown financial terrain. To that end, let’s look at what a floating, also known as a variable rate product is, and how investors can benefit from it.
What Is a Floating Rate Note?
A Floating Rate Note, FRN, or “floater” is a financial instrument with an interest rate that changes or “floats” based on an external benchmark. A floating-rate note may refer to any interest-bearing debt instrument.
The rate for an FRN is based on any one of three possible benchmarks:
- The U.S. Federal Funds Rate (also known as the Federal Reserve interest rate, sometimes just referred to as “the Fed”)
- The U.S. Treasury bill rate
- The London Interbank Offered Rate (also referred to as LIBOR).
Every floater has what’s called a “reset period.” This is how often the note adjusts its interest rate, changing the rate based on the external benchmark it follows. Reset periods may vary widely. Some notes may reset their interest rates daily or weekly, while others may do so only quarterly or annually.
Floating rate notes usually have relatively short maturity periods compared to a traditional bond. A common FRN matures in 2-5 years, although this time frame is not universal.
An FRN may also have what’s called a “cap” and a “floor.” These are the upper and lower limits the financial product can return. A floating rate note may not pay more than its cap or less than its floor, keeping it within certain limitations.
Traditional floating-rate notes also have quarterly coupons, meaning they pay interest four times a year at the start of every quarter. Others pay monthly, semi-annually, or just annually. Decentralized Finance — DeFi — products typically pay more frequently. Some may pay weekly, biweekly, or even daily.
Savvy investors are drawn to FRNs because they can benefit from higher interest rates that adjust at reset periods to follow the current market rate. A floater protects investors from rising interest rates as it allows them to reap higher yields when the rate is adjusted higher.
Example of a Floating Rate Product
To illustrate this, let’s use a traditional bank example. A Mainstreet Bank issues a floating rate note with a principal of $1,000. The Federal funds rate is +0.25%. The reset period is every three months. It matures in 5 years.
This FRN has a face value of $1,000. In five years, it will mature and will repay the principal. During the five years, until it matures, the floater will have an interest rate coinciding with the Federal Reserve’s interest rate plus 0.25%. So if the Federal Reserve rate were 2.5%, the FRN would bear an interest of 2.75%.
Every three months, timed to the quarterly Federal Reserve meeting, the FRN will update its interest rate, according to any changes the Fed makes. For example, say that the Federal Reserve rate falls from 2.5% to 2% at the board’s next meeting. This FRN, at its next reset date, would also adopt an interest rate of 2.25%.
Where to Go for a Floating Rate Product
EQIFI, the innovative DeFi protocol, offers customers unique ways to produce high returns on investments in these uncertain times. With more demand for borrowing increasing every day in the DeFi space, interest rates will automatically rise, encouraging more lenders to participate.
EQIFI stands apart from other DeFi platforms that may offer potentially high returns without the security savvy investors require. The difference is EQIFI is powered by EQIBank, a licensed and regulated bank recognized as one of the top ten digital banks in the world, serving customers in over 180 countries worldwide with superb 24/7 customer service.
The EQIFI platform seamlessly bridges DeFi to EQIBank, providing a much-needed alternative to traditional banking. Customers of EQIFI holding its native token “EQX” can also apply to EQIBank for banking accounts, where an impressive suite of banking services is offered. These include a global secured credit card for corporate and private clients, OTC trading, custody, and wealth planning solutions. Visit us today and sign up to learn more about how you can stay ahead of waning interest rates and rising inflation.