What are Floating Rate Bonds?
Floating rate bonds, also known as floaters or variable rate bonds, are fixed income instruments whose coupon (interest) rates get changed at periodic intervals. Their coupon rates are linked to pre-set benchmark rates like repo rate, T-Bill yields, NSC (National Savings Certificate) rates, etc. Thus, changes in their linked benchmark rates are transmitted to their coupon rates on pre-set dates. The re-setting of floater coupon rates at periodical intervals leads them to be aligned more or less with the prevailing market rates. This reduces the interest rate risk for the investors during a rising interest rate regime.
Features of Floating Rate Bonds:
Variable Coupon Rate: The coupon rate of a floating rate bond usually consists of two components — a base rate and a spread over it. The base rate is linked to the benchmark rate whereas the spread is fixed at the time of bond issuance or discovered through an auction process undertaken at the time of bond issuance.
For example, the coupon rate of RBI’s Floating Rate Savings Bond is linked to the interest rate offered on National Savings Certificate with a spread of 35 basis points (0.35%) over the prevalent NSC interest rate. Similarly, the coupon rate of a GOI FRB 2028 (i.e. floating rate bond issued by the central government having a maturity date of October 4, 2028) consists of a floating base rate and a spread of 64 bps (i.e. 0.64%) over the base rate fixed for the entire bond tenure. The variable base rate of this bond is reset after every six months and is equal to the average of the Weighted Average Yield (WAY) of the last three auctions of 182 Day T-Bills held before the rate resetting date.
Coupon Rate Reset Frequency: The interest rates of floating rate bonds can be reset at monthly, quarterly, half yearly, annually or other pre-decided intervals. In case of floating rate bonds issued by the Government of India, the reset frequency has been set at half yearly intervals. The only exception is GOI FRB 2035, whose coupon rate is reset after five years. This bond was issued on January 25, 2005 with a maturity date of January 25, 2035.
Interest Payments Dates: The interest payable of a floating rate bond is calculated on its face value depending on the rate set for the coupon period. Then, the interest component is paid to the bond investors on their pre-determined coupon payment dates.
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Types of floating rate bonds available in India:
GOI Floating Rate Bonds (GOI FRBs)
These bonds are issued by the Government of India and are listed on stock exchanges. The interest component is paid to the investors at half yearly intervals. Similarly, the coupon rates of these bonds are also reset at half yearly intervals, just before the commencement of the semi-annual coupon period.
Here is a list of GOI FRBs currently available for investments
| Central Government Floating Rate Bonds | Current Coupon Rate (p.a.) | Interest Rate Reset Frequency | Maturity Date |
| GOI FRB 2028 | 7.11% | 6 months | October 4, 2028 |
| GOI FRB 2031 | 7.59% | 6 months | December 7, 2031 |
| GOI FRB 2033 | 7.81% | 6 months | September 22, 2033 |
| GOI FRB 2034 | 6.99% | 6 months | October 30, 2034 |
| GOI FRB 2035 | 6.66% | 5 years | January 25, 2035 |
Last updated on June 3, 2025
Floating Rate Savings Bond (FRSB) 2020 (Taxable):
While FRSBs are also issued by the Government of India, these are not transferable and hence, cannot be traded on stock exchanges. Here is a list of the other features of FRSB that investors should know:
Minimum investment: Rs 1,000 (in multiple of Rs 1,000 thereafter)
Maximum investment: No Limit
Coupon (Interest) rate: 8.05% p.a. (Linked to prevailing NSC interest rates plus a fixed spread of 35 bps)
Tenure: 7 years
Frequency of interest payment: Semi-annual
Date of interest payments: January 1 and July 1 of each year.
Lock-in period: 7 years (lower for senior citizens depending on their age)
Premature withdrawal facility: FRSBs do not allow premature withdrawal facility except to its senior citizen investors. Senior citizens aged 60-70 years can make premature withdrawals after the completion of 6 years. Those aged between 70-80 years & above 80 years can make premature withdrawals after the completion of 5 years and 4 years respectively.
Premature withdrawal penalty: 50% of last coupon payment.
Collateral: FRSBs cannot be pledged to avail loans
Eligibility for investing in FRSB:
(i) resident individuals of India in his/her individual capacity, or in individual capacity on joint basis, or in individual capacity on any one or survivor basis, or on behalf of a minor as father/mother/legal guardian;
(ii) a Hindu Undivided Family
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Advantages of Investing in Floating Rate Bonds
Benefit from rising interest rates: The coupon rates of non-floating rate bonds remain fixed despite the changes in interest rates and inflation rates during a rising interest rate regime, leading to opportunity loss and lower inflation-adjusted income for their investors. Floating rate bonds allow investors to hedge against these risks as their coupon rates remain more or less adjusted with the changes in the market interest rates.
Lower volatility in bond prices: Bonds having fixed coupon rates have an inverse relationship with the interest rate regimes. The prices of fixed rate bonds tend to increase when interest rates fall and vice versa. In case of floating rate bonds, the interest rates are aligned with the market rates and thus, have lower volatility in prices than fixed-rate bonds of similar maturities. This makes floating rate bonds ideal for investors preferring stability in bond prices.
Can be purchased and sold in the secondary market: While GOI FRBs are tradable in the stock exchanges, FRSB 2020 have lock-in periods and thus, are not listed in the exchanges. Thus, investors seeking to purchase or sell GOI FRBs can do so through the stock exchanges as per their market prices, which can be more or less than their face value.
Disadvantages of Investing in Floating Rate Bonds
Lower coupon rates: Floating rate bonds carry lower interest rate risk than their fixed counterparts of similar maturity and credit profiles. This leads issuers to offer lower coupon rates on their floating rate bonds than their fixed rate bonds.
Higher income uncertainty: Floating rate bonds offer lower income certainty to their investors due to their floating interest rates. This makes floating rate bonds unsuitable for investors requiring a predictable income.
Lower interest income during falling rate cycle: While investors of floating rate bonds benefit from rising interest rate regimes, the opposite would be true in case of falling interest regimes. During an easing rate cycle, investors of fixed rate bonds would continue to earn the same interest rates while the investors of floating rate bonds would witness a reduction in their coupon rates.
Lower scope of capital appreciation during easing rate cycles: The inverse relationship of bonds with market interest rates leads fixed rate bond prices to appreciate during an easing interest rate cycle. As the coupon rates of floating rate bonds factor in the interest rate cycles, these bonds offer very low potential of capital appreciation during easing rate cycles. This feature makes floating rate bonds less attractive for investors aiming at capital gains from fixed income instruments during a falling interest rate regime.
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Who Should Invest in Floating Rate Bonds?
Investors should factor in their expectations regarding interest income, interest rate regime and capital appreciation while choosing between fixed rate and floating rate bonds. Investors seeking market-aligned interest income and/or lower volatility in bond prices can consider floating rate bonds. Investors seeking higher income stability and/or higher scope of capital appreciation during falling interest rate regimes should avoid floating interest bonds. They should instead prefer fixed rate bonds.