Floating Rate

Quick Summary of Floating Rate

Any interest rate that changes on a periodic basis. The change is usually tied to movement of an outside indicator, such as the prime interest rate. Movement above or below certain levels is often prevented by a predetermined floor and ceiling for a given rate. For example, you might see a rate set at “prime plus 2%”. This means that the rate on the loan will always be 2% higher than the prime rate, which changes regularly to take into account changes in the inflation rate. For an individual taking out a loan when rates are low, a fixed rate loan would allow him or her to “lock in” the low rates and not be concerned with fluctuations. On the other hand, if interest rates were historically high at the time of the loan, he or she would benefit from a floating rate loan, because as the prime rate fell to historically normal levels, the rate on the loan would decrease. also called adjustable rate.

A floating rate instrument is a debt security or corporate preferred stock whose interest rate is adjusted on a regular basis to reflect changing money market rates. These securities, such as five-year notes, are initially offered at a slightly lower interest rate than comparable fixed-rate securities. However, because the rate is periodically adjusted upward, its market price is usually very close to the offering price, or par. When a country’s currency fluctuates in value against the currency of another country, the relationship between the two is referred to as a floating exchange rate. For example, the US dollar is worth more to the Japanese yen at times and less at others. That movement is usually the result of what is going on in each nation’s economy as well as the economies of their trading partners. A fixed exchange rate, on the other hand, means that the relative value of two (or more) currencies, such as the US dollar and the Bermuda dollar, is always the same.

Cite Term

Definition Sources