London Interbank Offered Rate

Floating-rate bonds, often referred to as floating-rate notes (FRNs), also exist. The coupon rates of these bonds are reset periodically according to a predetermined benchmark, such as 3-month or 6-month LIBOR (London interbank offered rate). LIBOR is the official benchmark rate at which commercial banks will lend funds to other banks in the interbank market. It is an average of the offered rates posted by all the main commercial banks, and is reported by the British Bankers Association at 11.00 hours each business day. For this reason, FRNs typically trade more like money market instruments than like conventional bonds. 

Generally, the reference rate for FRNs is LIBOR, the London interbank offered rate—that is, the rate at which one bank will lend funds to another. The interest rate is fixed for a three- or six-month period, at the end of which it is reset. If, say, LIBOR is 7.6875 percent at the coupon reset date for a sterling FRN paying six-month LIBOR plus 0.50 percent, the FRN will pay 8.1875 percent for the following period, and interest will accrue at a daily rate of 0.0224315. 

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