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 bonds||Floating 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.|