Fixed rate bonds are a type of debt instrument that guarantees a certain amount of money. These bonds have a fixed maturity date and interest rate for the duration of the bond. As a result, fixed-rate bonds provide investors with a consistent stream of income, referred to as coupon payments. On the other hand, floating-rate bonds have a variable coupon rate that depends on the benchmark rate (repo rate or reverse repo rate). Thus, the coupon rates are reset at regular intervals. This article covers, in detail, the difference between fixed vs floating bonds.
Scripbox Recommended Goals
Plans that will help you to achieve your life goals across multiple time frames.
Difference Between Fixed Vs Floating Bonds
|Basis of Difference||Fixed Rate Bonds||Floating Rate Bonds|
|Meaning||Fixed rate bonds have a fixed interest rate throughout the bond tenure.||For floating rate bonds, the interest rate fluctuates during the bond tenure.|
|How Do They Work?||Fixed-rate bonds are issued for a fixed tenure. Furthermore, the bond issuer fixed the coupon rate. Bondholders will receive interest annually, semi-annually, or monthly after the fixed-rate bonds are issued. The bondholder will get the face value when the bond matures (principal amount).||Floating rate bonds have floating coupons that move in line with the market rates. As a result, if interest rates rise, the coupon rates also rise, but the bond prices remain the same. As a result, the bondholder receives higher returns.|
|Coupon Payments||You will get a predetermined coupon payment throughout the bond tenure, either monthly, half-yearly, or yearly.||Throughout the bond tenure, you receive a variable coupon rate. In other words, when the interest rate rises, so do the coupon rates, and vice versa. Hence the coupon payments vary.|
|Maturity Amount||Bondholders are well aware of the maturity amount. In other words, before purchasing the bond, you will know the amount you will be receiving at the end of the bond tenure and also the coupon payments.||Due to the changing interest rates, it is difficult for you to predict the final maturity amount.|
|Risk||Fixed-rate bonds are extremely vulnerable to interest rate movements.||Floating rate bonds are not as sensitive as fixed-rate bonds to interest rates movements.|
|Suitability||Fixed rate bonds are suitable for investors who wish to know how much they receive at the end of the bond tenure. Furthermore, the regular fixed coupon payments help them plan their financial goals in a better way.||Floating rate bonds are suitable for investors who wish to take advantage of the changing interest rate movements.|