What Is a Floating Rate Note?

By Matthew Frankel, CFP – Updated Jan 1, 2025 at 11:22 AM

Key Points

FRNs adjust interest rates over time, linked to benchmarks like the federal funds rate.
They offer protection against rate hikes but generally yield less initially than fixed-rate notes.
Suitable for long-term portfolios, FRNs can act as a hedge in rising interest rate scenarios.

A floating-rate note (FRN) is an interest-bearing debt security with an interest rate that can change, or float, over time. These income investments can protect investors from rising interest rate environments and can also be desirable for issuers, especially when interest rates are relatively high.

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A pile of square pieces of paper with an interest rate written on each and one in the middle with a question mark on it. — Image source: Getty Images.

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The main downside to floating-rate notes is that they typically pay significantly lower yields when issued compared with fixed-rate debt securities of similar maturities. Think of this as a trade-off. You give up some immediate income in exchange for protection in the event that benchmark interest rates rise significantly.

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On the other hand, FRNs can be a smart addition to the fixed-income portion of a long-term investment portfolio. Their coupon payments (interest payments) can be unpredictable, but for long-term investors, they can be a hedge against the often damaging effects of rising interest rates on a stock portfolio.

It's also important to note that FRNs are not the same as inflation-protected bonds, such as I bonds. It's entirely possible to have little or no inflation in a rising-rate environment and vice versa. So, FRNs are not guaranteed to keep pace with inflation over time. In fact, if inflation is high at a time when benchmark rates are low, the exact opposite can be true.

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About the Author

Matt Frankel, CFP, is a contributing Motley Fool stock market analyst and personal finance expert covering financial stocks, REITs, SPACs, and personal finance. Prior to The Motley Fool, Matt taught high school and college mathematics. He holds a bachelor’s degree in physics from the University of South Carolina, a master’s degree in mathematics from Nova Southeastern University, and a graduate certificate in financial planning from Florida State University. He won a SABEW award for coverage of the 2017 Tax Cuts and Jobs Act. He is also regularly interviewed by Cheddar, The National Desk, and other TV networks and publications for his financial, stock market, and investing expertise.

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