CFA Level I Exam · Yield and Yield Spread Measures for Floating-Rate Instruments

Floating-Rate Note Features and Index Rates

Updated 7 October 2026 · Fact-checked

A floating-rate note (FRN) pays a coupon equal to a reference rate plus a quoted margin, reset at set intervals. Caps limit the maximum coupon, floors limit the minimum. To solve questions, find the reference rate at reset, add the margin, then apply any cap or floor and the period fraction.

Understand Floating-Rate Note Features and Index Rates

A floating-rate note (FRN) is a bond whose coupon changes over time. A fixed-rate bond pays the same coupon every period. An FRN pays a coupon that follows market interest rates. Because the coupon adjusts to market rates, the price of an FRN stays close to par at reset dates, provided the issuer's credit risk and the required margin are unchanged.

The coupon has two parts. The reference rate (also called the index rate) is the market rate that moves, such as SOFR for USD, €STR or Euribor for EUR, or SONIA for GBP. The quoted margin is a fixed spread added to the reference rate. It reflects the issuer's credit risk and is set when the note is issued. Coupon rate = reference rate + quoted margin.

The reset frequency is how often the coupon is updated. A note that resets quarterly pays a coupon based on the rate observed at the start of each quarter. Traditional term-rate FRNs, such as those linked to 3-month Euribor, set the rate at the start of the period and pay at the end (in arrears payment). RFR-based FRNs typically compound the daily rates over the period and determine the coupon at the end of the period. For a term-rate note, the reference rate tenor usually matches the reset period, for example 3-month Euribor for a quarterly reset.

Index rates have changed. LIBOR was a survey-based rate and has been discontinued. It is replaced by overnight risk-free rates such as SOFR (USD), SONIA (GBP) and €STR (EUR), which are based on actual transactions in overnight markets. Because they are overnight rates, FRNs using them often compound or average the daily rates over the period. Risk-free rates contain almost no bank credit risk, so the margin may be adjusted to compensate.

FRNs can include a cap, a maximum coupon rate, which benefits the issuer. A floor is a minimum coupon rate, which benefits the investor. A collar has both. A inverse floater is a different structure: its coupon moves opposite to the reference rate, for example 8% minus the reference rate. Some FRNs also have a leverage factor, which multiplies the reference rate.

Key formulas to remember

FRN coupon rate: Coupon rate = Reference rate + Quoted margin; Annual rate. Quoted margin is fixed at issue and is stated in basis points or percent.
Coupon payment per period: Coupon payment = Coupon rate × Period fraction × Par value; Quarterly reset: period fraction ≈ 0.25. Use the annual rate, not the rate per period, as the base.
Cap and floor: Coupon = min(cap, max(floor, reference rate + margin)); Apply the cap and floor to the total coupon rate unless the question says otherwise.
Inverse floater coupon: Coupon rate = Fixed rate − (Leverage factor × Reference rate); Coupon rises when the reference rate falls. Often has a floor of 0%.

How to solve Floating-Rate Note Features and Index Rates questions

Use this order for any question on FRN structure or coupon calculation.

1Identify the reference rate and its tenor, and check it matches the reset period.
2Note the quoted margin and convert basis points to percent (100 bp = 1%).
3Find the reference rate that applies at the reset date. Usually it is set at the start of the period.
4Add the margin: coupon rate = reference rate + quoted margin.
5Apply any cap or floor to the resulting annual coupon rate.
6Convert to a coupon payment: coupon rate × period fraction × par value.
7Check who benefits: caps help the issuer, floors help the investor, and rate rises help FRN holders only up to the cap.

Quickest way: Add, clamp, scale

When to use it: Use for any coupon calculation with a cap or floor when time is short.

Add the margin to the reference rate.
Compare with the cap and floor, and replace the result if it breaks either limit.
Multiply by the period fraction (0.25 for quarterly, 0.5 for semiannual) and par value.
Eliminate options with the wrong period fraction or ones that ignore the cap or floor.

Common mistakes in Floating-Rate Note Features and Index Rates

Forgetting to apply the cap or floor
You compute reference rate plus margin and stop.
Fix: Always compare the total coupon rate with the cap and floor before paying out.
Using the annual coupon rate as the period payment
The coupon is quoted as an annual rate, so the period fraction is skipped.
Fix: Multiply by the period fraction, such as 0.25 for quarterly payments.
Saying the quoted margin changes with the reference rate
Confusing the margin with the floating component.
Fix: The quoted margin is fixed at issue. Only the reference rate resets.
Thinking a cap helps the investor
Assuming any limit is protective.
Fix: A cap limits the maximum coupon, so it benefits the issuer. A floor benefits the investor.
Treating basis points as percent
Rushing with margins like 75 bp.
Fix: Divide basis points by 100 to get percent: 75 bp = 0.75%.
Assuming the FRN price always equals par
Remembering that resets bring the price near par.
Fix: Price stays near par only if the quoted margin matches the required margin and the note is at a reset date. A credit change or a binding cap or floor moves the price away from par.

Worked examples

Example 1

A 3-year FRN with par value of $1,000,000 pays quarterly at 3-month SOFR + 90 bps, with a cap of 5.00%. At the start of a quarter, 3-month SOFR is 4.35%. What coupon is paid at the end of the quarter? A. $10,875 B. $11,250 C. $12,500

Show the solution

Coupon rate = 4.35% + 0.90% = 5.25%.
The cap is 5.00%, and 5.25% exceeds it, so the coupon rate is 5.00%.
Quarterly payment = 5.00% × 0.25 × $1,000,000 = $12,500.
Check options: $10,875 would result from 4.35% × 0.25 (ignores the margin). $11,250 corresponds to 4.50%, which is wrong. Only $12,500 uses the capped rate of 5.00%.

Answer: C. $12,500

Example 2

A semiannual FRN with par value €500,000 pays 6-month Euribor + 1.20%, with a floor of 2.00%. At the reset date, 6-month Euribor is 0.40%. What is the coupon payment for the period? A. €5,000 B. €8,000 C. €10,000

Show the solution

Coupon rate before floor = 0.40% + 1.20% = 1.60%.
The floor is 2.00%, and 1.60% is below it, so the coupon rate is 2.00%.
Semiannual payment = 2.00% × 0.5 × €500,000 = €5,000.
Without the floor the payment would be 1.60% × 0.5 × €500,000 = €4,000, which is not an option. €8,000 would be 1.60% on a full year, and €10,000 would be 2.00% for a full year.

Answer: A. €5,000

Exam tips

Questions often hide the answer in the cap or floor. Check whether the total coupon rate breaches the limit.
Know who benefits: cap helps the issuer, floor helps the investor, collar combines both.
Match the period fraction to the reset frequency before multiplying.
Know that LIBOR has been replaced by overnight risk-free rates such as SOFR, SONIA and €STR, and that these are transaction-based.
An inverse floater's coupon moves opposite to the reference rate. Its price falls when rates rise, and it typically has a longer effective duration than a comparable fixed-rate bond.

Practice questions from Yield and Yield Spread Measures for Floating-Rate Instruments

Floating-Rate Note Features and Index Rates: frequently asked questions

What is the quoted margin in a floating-rate note?

The quoted margin is the fixed spread added to the reference rate to give the coupon rate. It is set at issue and compensates investors for the issuer's credit risk. It does not change when the reference rate resets.

How does SOFR differ from LIBOR for FRNs?

LIBOR was based on bank submissions and carried bank credit risk, and it has been discontinued. SOFR is an overnight rate based on actual repo transactions secured by US Treasuries, so it is close to risk-free. FRNs linked to SOFR usually use compounded or averaged daily rates.

Who benefits from a cap and a floor on an FRN?

A cap benefits the issuer because it limits the highest coupon it must pay. A floor benefits the investor because it guarantees a minimum coupon. A collar contains both.

Why does an FRN trade near par at reset dates?

The coupon adjusts to current market rates, so the cash flows track what investors require. Any gap comes from a change in the issuer's credit quality or a required margin different from the quoted margin, not from rate moves.