What is Floating Rates Bonds, Should You Invest; Know Everything

Bonds are nothing but debt securities that are issued to raise funds. In India, bonds are issued by banks, corporate houses, and governments. By issuing a floating bond or common bond, the bond issuing agency, bank or government borrows capital at a fixed or floating interest rate for a specified period. 

The above statement clears that there are two types of bonds, fixed interest rate bonds and variable/floating rate bonds. Today we will give you detailed information about floating-rate bonds.

What are floating rate bonds?

as the name suggests, Floating rate bonds have interest rates that vary depending on the benchmark rate (RBI benchmark Repo Rate). Simply, the interest rate on a floating rate bond keeps changing throughout its term. In India, the rate on floating rate bonds depends on the repo or reverse repo rate.

Also Read: Post Office Monthly Income Scheme: Understand Math To Earn Around 9,000 Every Month

To get a better understanding of floating rate bonds, you can compare them with floating home loan rates. Like a floating home loan, you have to pay higher or lower EMI and interest rates depending on the revised repo rate. Similarly, any change in repo rates may result in profit or loss to an investor. Typically, interest on such bonds is paid quarterly, half-yearly, or annually as per the terms of the bond.

How do floating rate bonds work

Let's assume that you have invested in a floating rate bond and at the time when you invested in the bond the interest rate was 8.0 percent, and after a while Reserve Bank Of India revised the repo rate by 0.5 basis points. Then, the interest rate will change accordingly.