This frequent repricing distinguishes them from fixed rate bonds and is the primary source of their interest rate resilience. This spread remains constant for the life of the security, while the benchmark component resets periodically, sometimes as frequently as every week or month.
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Risks and Considerations for Investors Despite the protection against rising rates, floating bonds are not without risks. Credit risk remains a primary concern, as the issuer’s ability to make payments relies on their financial health rather than the stability of a fixed coupon.
The choice between the two often hinges on the investor’s outlook on the interest rate cycle and their risk tolerance regarding duration. Due diligence should focus on the credit rating of the issuer, the specific benchmark used, and the frequency of the reset period to ensure the security matches the investment objectives.
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Evaluating the Investment Fit Determining whether a floating rate security aligns with a portfolio requires a thorough analysis of the macroeconomic outlook. Additionally, investors face reinvestment risk; when the benchmark resets lower, the yield of the security may decline, potentially lagging behind other available investments.
More About Floating bond
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