Floating-rate notes (FRNs)
About this course
Discount margin vs spread, reset profiles, when LAs use them as a SONIA-tracking treasury investment. With worked examples.
What you'll learn
- What FRNs are
- Pricing & spreads
- Buying & selling
- When to use FRNs
Part of these pathways
Related courses
- SONIA Forward Curve & OIS
- Money Market Funds (CNAV / LVNAV / VNAV)
- Short-duration bond funds & VNAVs
- Intra-LA borrowing & lending markets
- DMADF deep dive
- Term deposits, CDs & T-Bills
Common questions
What is Credit sensitivity?
FRN price still moves on credit spread changes — if the market's required spread for the issuer widens, the FRN's price falls. Captured by the discount margin (DM) — DM moves with the issuer's credit terms.
What is Discount margin (DM)?
FRN equivalent of yield to maturity. The fixed spread over the reference rate that, applied to all future expected coupons, makes their discounted value equal the current price. Compares directly to other FRNs' DMs and to the spread at issuance.
What is Floating-rate note (FRN)?
Bond whose coupon resets periodically against a reference rate, typically SONIA Compounded plus a fixed spread. Coupons reflect prevailing short-term rates rather than being fixed at issuance. Materially less price-sensitive to interest rate moves than fixed-rate bonds. Common bank funding instrument.
What is FRN tenor?
Most LA-relevant FRNs are 1-5 year maturities, occasionally to 7 or 10. Longer FRNs exist (bank capital instruments) but rare in LA portfolios. The 1-5y range is where SONIA + spread economics work best vs alternative LA investments.
What is IFRS 9 classification for FRNs?
Subject to standard IFRS 9 tests. SPPI test typically passes for vanilla FRNs (cash flows are SONIA + spread + principal). Hold-to-collect classification supports amortised cost. Many LAs hold FRNs at amortised cost where intent is hold-to-maturity.
What is Rates sensitivity?
How much an FRN's price moves on a parallel rate shift. Materially less than fixed-rate bonds because coupons reset to prevailing rates. A 5-year FRN typically has modified duration around 0.25 (the time to next reset), vs ~4.5 for a fixed-rate bond of the same maturity.