Floating Rate Corporate Bond

Floating rate corporate bond mutual funds and ETFs invest in bonds and... Floating rate corporate bond mutual funds and ETFs invest in bonds and other types of fixed income securities, issued by companies, whose interest payments fluctuate based on an underlying reference rate. Typically, floating rate bonds (floaters) are benchmarked to a shorter term reference rate like the London Inter-Bank Offer Rate (LIBOR), which major global banks use to lend to each other. Floaters often have what are known as ‘caps’ and ‘floors’, letting investors know the maximum and minimum interest rates to be paid. A cap is a limit to the interest rate an issuer will pay, regardless of what happens to the reference rate. A floor, meanwhile, is the minimum interest rate an investor will receive. As interest payments of floaters adjust to shifts in short-term interest rates, their prices are relatively stable compared to fixed rate bonds, making them less sensitive to changing interest rates. However, floaters carry credit risk as economic uncertainty can cast doubt on the floater’s issuer to pay back interest and principal on time. Typically, investment-grade floating rate funds and ETFs attract investors concerned about the impact of interest rate risk on fixed income portion of their portfolios, especially during rising rate environments. Last Updated: 11/04/2024 View more View less

Floating rate corporate bond mutual funds and ETFs invest in bonds and other types of fixed income securities, issued by companies, whose interest payments fluctuate based on an underlying reference rate. Typically, floating... Floating rate corporate bond mutual funds and ETFs invest in bonds and other types of fixed income securities, issued by companies, whose interest payments fluctuate based on an underlying reference rate. Typically, floating rate bonds (floaters) are benchmarked to a shorter term reference rate like the London Inter-Bank Offer Rate (LIBOR), which major global banks use to lend to each other. Floaters often have what are known as ‘caps’ and ‘floors’, letting investors know the maximum and minimum interest rates to be paid. A cap is a limit to the interest rate an issuer will pay, regardless of what happens to the reference rate. A floor, meanwhile, is the minimum interest rate an investor will receive. As interest payments of floaters adjust to shifts in short-term interest rates, their prices are relatively stable compared to fixed rate bonds, making them less sensitive to changing interest rates. However, floaters carry credit risk as economic uncertainty can cast doubt on the floater’s issuer to pay back interest and principal on time. Typically, investment-grade floating rate funds and ETFs attract investors concerned about the impact of interest rate risk on fixed income portion of their portfolios, especially during rising rate environments. Last Updated: 11/04/2024 View more View less