Floating rate bonds, also known as variable rate bonds, are debt securities with interest payments that adjust periodically based on a benchmark rate. Unlike fixed-rate bonds, where the coupon remains constant, floating-rate bonds have interest payments that rise or fall with market interest rates. Common benchmarks include the LIBOR, SOFR, or a government treasury rate. These adjustments usually occur every three or six months, depending on the bond’s terms.

One of the main advantages of floating rate bonds is protection against rising interest rates. When rates go up, the bond’s coupon increases, helping investors maintain their income level. This makes them attractive during periods of inflation or tightening monetary policy. However, when interest rates fall, the coupon payments decrease, reducing returns compared to fixed-rate bonds.

For issuers, floating rate bonds can help manage borrowing costs more effectively in volatile markets. For investors, they offer lower price volatility since their value does not drop as sharply when rates rise. These bonds are commonly issued by corporations, financial institutions, and governments seeking flexible financing options.

While floating-rate bonds can be a useful addition to a diversified portfolio, they are not risk-free. Credit risk, changes in benchmark reliability, and market liquidity issues can still affect performance, making due diligence essential before investing.