Contents
Definition
A floating-rate bond (FRB, also called a variable-rate bond or floater) is a debt instrument whose coupon payment is not fixed at issuance but resets at predetermined intervals against a specified benchmark rate plus a spread:
Coupon(t) = Benchmark Rate(t) + Spread
where the spread is fixed at issuance and the benchmark resets each period (quarterly or semi-annually). Common benchmarks in India include: (a) the 91-day T-bill yield (RBI auction-determined, the conventional academic "risk-free rate" proxy for very short maturities); (b) MIBOR (Mumbai Interbank Offer Rate, administered by FBIL); and (c) the NSE MIBOR overnight rate for ultra-short instruments. The RBI issues Floating Rate Savings Bonds (FRSB) 2020 directly to retail investors — pegged at 35 bps above the National Savings Certificate (NSC) rate, currently resetting to 8.05% as of the most recent reset.
How it is computed
At each reset date, the new coupon is computed as: New Coupon = Benchmark + Contractual Spread. For a MIBOR-linked corporate bond with spread = +65 bps, if 3-month MIBOR resets to 6.80%, the next quarter's coupon = 7.45% annualised. Because the coupon adjusts toward current market rates at each reset, the bond's price stays close to par between reset dates — the interest rate risk (duration) is effectively capped at the time until the next reset, not the full maturity. Modified Duration of a floater ≈ time to next coupon reset (e.g., 0.25 years for quarterly reset), regardless of stated maturity. Post-reset, the duration "resets" to near zero again. SEBI's NCS Regulations 2021 require the reset mechanism, benchmark, spread, and reset frequency to be disclosed in the offer document.
Why it matters for investors
FRBs are the preferred instrument for investors who want bond-like credit exposure while avoiding duration/interest-rate risk: (1) Rising-rate environments: When RBI raises the repo rate, the T-bill benchmark rises, and FRB coupons automatically step up — protecting investors from the price erosion that fixed-coupon bond holders suffer. (2) Low mark-to-market volatility: Since MD ≈ time to next reset (often 0.25–0.5 years), NAV of floating-rate debt funds is nearly immune to rate moves. SEBI's Floater Fund category requires minimum 65% in floating-rate instruments. (3) Spread capture: Corporates issuing FRBs must offer a spread above the benchmark — AAA corporates typically at T-bill + 30–60 bps, AA+ at T-bill + 70–100 bps. (4) RBI FRSB retail access: RBI's FRSB 2020 is available through designated banks (SBI, nationalised banks, private banks) with no demat required — making floating-rate exposure accessible to retail investors.
Worked example
An investor holds ₹10 lakh face value of a 5-year Power Finance Corporation (PFC) AA+ FRB, resetting quarterly at 91-day T-bill + 75 bps. Reset history over 1 year:
| Quarter | 91-day T-bill | Coupon (ann.) | Quarterly cash received |
|---|---|---|---|
| Q1 | 6.75% | 7.50% | ₹18,750 |
| Q2 | 6.85% | 7.60% | ₹19,000 |
| Q3 | 6.60% | 7.35% | ₹18,375 |
| Q4 | 6.80% | 7.55% | ₹18,875 |
Total year 1 interest = ₹75,000 (avg 7.50%). A comparable 5-year fixed-rate PFC bond at 7.70% would have earned ₹77,000 but would have also suffered ~4.12% capital loss if yields rose 100 bps. The FRB sacrifices a small coupon premium in exchange for near-zero duration risk.
Caveats
Benchmark discontinuation risk: If the reference rate benchmark (e.g., MIBOR) is reformed or discontinued (similar to LIBOR transition globally), fallback language in the bond indenture determines the replacement rate. Spread compression: In falling-rate cycles, fixed-rate bonds outperform floaters since coupon of floaters falls with the benchmark. Credit risk unchanged: FRBs eliminate duration risk but retain full credit risk — a floating-rate bond from a stressed issuer still carries default risk. Liquidity: FRBs are less liquid than benchmark fixed-rate G-Secs in the secondary market; retail investors may face wider spreads.
See also
Primary source
- RBI — Floating Rate Savings Bonds 2020 (Taxable): rbi.org.in — FRSB 2020
- SEBI NCS Regulations 2021 (floating-rate disclosure): sebi.gov.in
- FBIL MIBOR benchmark: fbil.org.in
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