When you hear the term floating rate note, it’s usually a bad idea. Such notes are financial products whose interest-bearing capacities are based on future expectations of economic activity. That means they are not tied to anything concrete; they’re more like future contracts. But what’s in a floating rate note? And how is it different from, say, a certificate of deposit (CD) for a particular time period?
Description Floating rate notes are financial securities whose interest-bearing capacity is determined by a future date, typically in the near future. The note’s interest rate is subject to changes in fundamental factors, such as current economic conditions and interest rates in various countries. Most floating notes are global in nature. In general, the more volatile the interest rate in any given country, the higher the floating note’s risk/value.
Interest Rate Swaps If a certain country’s interest rates rise above a certain level, then the companies lending money in that country will need to pay more than usual in order to borrow from other lending institutions. If there is little or no inflation, the companies’ profits will decrease since they will be unable to increase their costs of production. At the same time, currency depreciation can reduce the value of a floating note. That’s why companies holding these notes are always interested in exchange rates and any potential changes in the global economy. These companies use floating notes as collateral for their financial transactions.
Security Features a good feature of a floating note is that its interest rates, when compared to those of other financial instruments, are very flexible. This means that investors can choose whether to take their chance in the global markets or stick with their local currencies. This feature allows investors to capitalize on fluctuations in the global markets. The rates can also be determined according to factors that are within the control, which makes it easier for the issuer of the floating note. This is an advantage for those who need to get the money quickly.
Risk-Free Interests One of the risks of holding a floating note is that you have high risks of getting an early redemption if interest rates fall. If the company issuing the note starts paying interest only at a low-interest rate, the borrower has no room to negotiate because he won’t receive any extra money after the company pays all interest. However, if the company offers high interest, the borrower can benefit by purchasing a convertible bond where he can convert his notes into cash when interest rates go up because of interest rate swap tax treatment.
You May Also Find This Kind Of Note Obtaining: If you’re a company that wants to use a floating note as capital for buying shares or property, you may find this kind of note beneficial. It helps you secure your funding without having to provide security by offering real estate. While it will be less liquid than most other types of bonds, it’s still fairly valuable and worth looking into. In fact, the company issuing the note may prefer to issue the bond as a whole instead of selling individual notes so that the rates can remain competitive.
Sargent Charlebois 