Risk
FRNs carry little interest rate risk. A FRN has a duration close to zero, and its price shows very low sensitivity to changes in market rates. When market rates rise, the expected coupons of the FRN increase in line with the increase in forward rates, which means its price remains constant. Thus, FRNs differ from fixed rate bonds, whose prices decline when market rates rise. As FRNs are almost immune to interest rate risk, they are considered conservative investments for investors who believe market rates will increase. The risk that remains is credit risk.
Read more about this topic: Floating Rate Note
Famous quotes containing the word risk:
“Nature, we are starting to realize, is every bit as important as nurture. Genetic influences, brain chemistry, and neurological development contribute strongly to who we are as children and what we become as adults. For example, tendencies to excessive worrying or timidity, leadership qualities, risk taking, obedience to authority, all appear to have a constitutional aspect.”
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