Floating Rate or Variable Rate debt, refers to a form of financing where the interest rate used to calculate the interest due in each period changes (i.e. varies or floats) periodically. The interest rate for a floating rate loan is generally calculated by taking a regularly-changing benchmark rate (e.g. LIBOR, SOFR, Government Bonds, etc), and adding some premium to that rate to arrive at a periodic interest rate. Floating Rate debt is in contrast to Fixed Rate debt, where the interest rate does not change.
So for instance, imagine that the annual interest rate on a floating rate loan is calculated each month by taking the One Month LIBOR and adding 200 bps (i.e. 2.00%) to arrive at the periodic interest rate. If in month one the One Month LIBOR was 0.50%, than the annual interest rate for purposes of calculating the interest due in month one would be equal to 0.50% + 2.00% = 2.50%.
Further imagine that from month one to month two, the LIBOR rate increased from 0.50% to 0.60%. For purposes of calculating interest in month two, the annual interest rate would increase from 2.50% to 2.60% (0.60% + 2.00%).« Back to Glossary Index