Floater

Attractive as a defensive investment:

Floating Rate Notes are securities with variable rates. Their nominal yield is adjusted at regular intervals, usually quarterly or semi annually, based on a reference rate, e.g. Euribor. Floaters are therefore considered defensive investments and are often used for cash management.

The discounted margin:

The discounted margin is the spread to the reference rate, eg Euribor. It is based on maturity and the credit quality of the issuer. This results in a fluctuating base yield (quoted margin) and an issuer-specific yield, or discounted margin. The latter allows different securities to be compared and is the typical valuation methodology.

The quoted margin:

Unlike the discounted margin, the quoted margin remains unchanged during the life of the floater. The better the rating and standing of the issuer, the lower the quoted margin.

Summary:

The interest risk is limited by regular adjustments to money market rates. The credit and spread risk corresponds to a comparable fixed coupon security, though. Therefore, rate changes have a large influence on the discounted margin.

As a mixture of a commercial paper and a fixed interest credit bond product, Floaters regularly provide interest yields that are close to the market. They are an interesting investment when money market interest rates are increasing or decreasing.

Floater

Attractive as a defensive investment:

The discounted margin:

The quoted margin:

Summary:

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