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Floating Rate Bonds: Types, Advantages and Disadvantages

26 Aug, 2025

4 mins read

When interest rates move, so do investment returns. That’s why many investors explore instruments like floating rate bonds, which offer flexibility in changing market conditions. If you're wondering what are floating rate bonds, how they work, and whether they fit your investment style, this guide breaks it all down.

What are Floating Rate Bonds?

Floating rate bonds are debt instruments where the interest (or coupon) rate is not fixed. Instead, the rate changes periodically based on a benchmark, such as the repo rate or treasury bill yield.

In simple terms, while fixed-rate bonds pay a steady interest rate, floating rate bonds adjust their returns based on market conditions. This makes them attractive when interest rates are rising.

How Do Floating Rate Bonds Work?

Here’s how floating rate bonds work:

These bonds pay interest at regular intervals, such as every six months.
The rate is tied to a benchmark like the Reserve Bank of India’s (RBI) repo rate.
If the benchmark rate increases, the interest payout also rises. If it drops, returns go down.

Example: A bond with a floating rate of "Repo rate + 0.5%" means if the repo rate is 6%, the bond pays 6.5% interest. If the repo rises to 6.75%, the bond will pay 7.25%.

This feature helps protect investors from interest rate risk.

Types of Floating Rate Bonds in India

There are different types of floating rate bonds available in India:

Government Floating Rate Bonds (RBI Bonds)

Issued by the Reserve Bank of India.
Considered one of the safest investment options.
Interest rates reset every 6 months.

Corporate Floating Rate Bonds

Issued by private or public sector companies.
Higher returns than government bonds, but with more risk.
Benchmark may vary (e.g., MIBOR, LIBOR).

Bank-Issued Floating Bonds

Offered by banks, especially during variable interest cycles.
May come with call and put options.

These options help investors match their risk tolerance and return expectations.

Advantages of Floating Rate Bonds

Here are the major advantages of floating rate bonds:

Protection from Rate Fluctuations: Returns increase when interest rates rise.
Regular Income: Like fixed bonds, they offer periodic interest payments.
Lower Price Volatility: Less sensitive to interest rate movements than fixed-rate bonds.
Diversification: Adds balance to a bond portfolio.
Government Backing (for RBI Bonds): Offers high credit safety.

Disadvantages of Floating Rate Bonds

Despite their benefits, there are some disadvantages of floating rate bonds:

Unpredictable Returns: Interest income varies; hard to forecast cash flow.
Lower Income in Falling Rates: When rates fall, so do your returns.
Limited Capital Gains: Price appreciation potential is lower.
Complex Terms: Not all investors understand how benchmarks work.

Example of Floating Rate Bonds

Let’s take an example of floating rate bonds:

RBI Floating Rate Savings Bond (2020 Series)

Tenure: 7 years
Interest: Payable every 6 months
Rate: Linked to National Savings Certificate (NSC) rate + 35 basis points
Minimum Investment: ₹1,000
No secondary market trading allowed (non-transferable)

If the NSC rate is 7%, the bond pays 7.35%. The rate resets every 6 months.

When Should You Invest in Floating Rate Bonds?

Floating rate bonds may suit certain conditions and investor types:

Suitable When:

Interest rates are rising: Floating bonds offer higher returns when benchmark rates increase.
You want regular income: They offer predictable payouts, although the amount varies.
You seek safety: RBI-issued bonds are secure and reliable.

Suitable For:

Conservative investors with a low to medium risk profile.
Retirees looking for income protection against inflation.
Investors diversifying a fixed-income portfolio.

Always match your goals, risk appetite, and market outlook before investing.

Conclusion

Floating rate bonds are a smart choice when interest rates are expected to go up. They offer flexibility, regular income, and reduced interest rate risk. Whether you’re looking at floating rate bonds in India from the RBI or exploring corporate options, it’s important to understand the risks and rewards. As with any investment, study the terms carefully and ensure it fits your overall financial plan.