Floating Rate Bond (FRB)

Subject – Economy

Context – RBI rejects all bids for 10-year G-Sec, FRB

Concept –

A floating rate bond is a debt instrument that does not have a fixed coupon rate, but its interest rate fluctuates based on the benchmark the bond is drawn.
Benchmarks are market instruments that influence the overall economy.
For example, repo rate or reverse repo rate can be set as benchmarks for a floating rate bond.
FRBs were first issued in September 1995 in India.
The rate of interest of a floating rate bond is linked to a benchmark rate and is reset at a regular interval.
Interest rate risk is largely mitigated as these bonds will pay higher return when prevailing rates are high.
There is no certainty of the future stream of income when investing in a floating rate bond.
The best time to buy floating rate bonds is when rates are low and are expected to rise.

To know about G-Sec, please refer September 2021 DPN.

To know about G-Secs to floating rate bonds, please refer October 2021 DPN.