Floating Rate vs Fixed Rate Bonds1 min read

A fixed rate bond is a debt instrument which pays same level of interest, known as coupons, over its entire term.

An investor who wants to earn a guaranteed interest rate for a specified term could purchase a fixed rate bond in the form of treasury, corporate bond, municipal bond or certificate of deposit.

A floating rate bond is a debt instrument with a variable interest rate and interest-rate for the bond is tied to a short-term benchmark rate such as LIBOR or the Fed funds rate etc.

 The fundamental distinctions between the two types of bonds – 

Fixed-rate bondsFloating rate bonds
These bonds are known as fixed-rate bonds as their rates remain fixed throughout the investment term.These bonds are known as floating rate bonds as their rates tend to fluctuate throughout the investment term.
A fixed-rate bond is susceptible to interest rate risk.A floating-rate bond does not expose investors’ deposit to interest rate risk.
Investors can easily ascertain the final amount they would receive on maturity.Investors find it challenging to ascertain the final amount they would receive on maturity.
They help to craft a financial plan and further help to align financial goals accordingly.It is not easy to build a reliable financial plan as the returns may or may not align with a specific financial goal.