Floating Rate Note Versus Fixed Rate Note
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Can you please determine the pros and cons between a floating rate note and a fixed rate note and under which conditions you would prefer one over the other.
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Solution Summary
This solution compares the advantages and disadvantages of a floating rate note to those of a fixed rate note.
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According to Wikipedia.org, "Floating rate notes (FRNs) are bonds that have a variable coupon, equal to a money market reference rate, like LIBOR or federal funds rate, plus a spread. By contrast, a fixed rate note is one with a rate which remains constant until the note matures or is called by the issuer."
Clearly, the advantage of a floating rate note is that, in an environment in which interest rates are generally declining, the issuer will incur lower interest ...
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