Abstract
Abstract This chapter provides an overview of floating rate notes (FRNs). Although FRNs originated in Europe, their first introduction in the United States came in 1974 when Citicorp sold $650 million worth of its 15-year notes. Since that time, FRNs have evolved into a variety of types. FRN types covered in the chapter include the plain, capped, floored, collared, reverse, super, deleveraged, perpetual, and flip-flop. An FRN can have a maturity of up to 30 years and include periodic interest rate adjustments throughout its life. An FRN uses a reference rate, such as London Interbank Offer Rate (LIBOR), Treasury bill (T-bill) rate, prime rate, or domestic certificate of deposit rate plus a spread to determine its coupon rate. The chapter provides a discussion of such risk factors as interest rate risk, credit risk, call/reinvestment risk, liquidity risk, and market risk. Additionally, it covers FRN valuation using spread for life, effective margin, total adjusted margin, discount margin, and option-adjusted spread methods.
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