What do floating rate notes (FRNs) typically offer investors?

What do floating rate notes (FRNs) typically offer investors?

• A. Fixed interest rates
• B. Variable interest rates
• C. Zero interest payments
• D. Long-term maturity timelines

Answer: (B)

Floating rate notes (FRNs) are a type of debt instrument that provide interest payments that fluctuate with a benchmark interest rate, typically tied to an index like LIBOR (London Interbank Offered Rate) or SOFR (Secured Overnight Financing Rate). This means the interest payments can adjust periodically, usually every three to six months, based on current market rates. Investors in FRNs benefit from the variable nature of these interest rates because as market rates rise, so do their interest payments, potentially leading to higher returns compared to fixed-rate instruments in a rising interest rate environment. This feature makes FRNs attractive for investors concerned about inflation or rising interest rates because it protects their returns against the diminishing purchasing power of fixed payments. In contrast, fixed interest rates do not change, zero interest payments mean there is no return on investment, and long-term maturity timelines are not indicative of the floating rate characteristic of FRNs. Hence, the variable interest rates provided by FRNs are a defining feature that caters to investors looking for adaptability in their investment income.

Floating rate notes (FRNs) are a type of debt instrument that provide interest payments that fluctuate with a benchmark interest rate, typically tied to an index like LIBOR (London Interbank Offered Rate) or SOFR (Secured Overnight Financing Rate). This means the interest payments can adjust periodically, usually every three to six months, based on current market rates.

Investors in FRNs benefit from the variable nature of these interest rates because as market rates rise, so do their interest payments, potentially leading to higher returns compared to fixed-rate instruments in a rising interest rate environment. This feature makes FRNs attractive for investors concerned about inflation or rising interest rates because it protects their returns against the diminishing purchasing power of fixed payments.

In contrast, fixed interest rates do not change, zero interest payments mean there is no return on investment, and long-term maturity timelines are not indicative of the floating rate characteristic of FRNs. Hence, the variable interest rates provided by FRNs are a defining feature that caters to investors looking for adaptability in their investment income.