A bond whose coupon resets periodically off a short-term benchmark such as SOFR plus a fixed spread, so its price barely moves with rates.
Because the coupon resets every one or three months, an FRN's duration is measured in weeks rather than years. Its price stays near par-value through rate cycles. What it does carry is spread-duration: if the issuer's credit deteriorates, the price still falls.
Floaters are how investors stay in credit without taking interest-rate-risk. In a rising-rate year they outperform fixed-coupon bonds badly; in a cutting cycle they lag.
Example: an FRN pays sofr + 80 bp, resetting quarterly. With SOFR at 5.30% the current coupon is 6.10%. If the Fed cuts 100 bp over a year, the coupon drifts down to about 5.10% while the price stays near 100.
Original diagrams for the ideas on this page. Illustrative, not real market data.
The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.
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