The Duration of a Floating Rate Note

A 10-year fixed-rate bond and a 10-year floating-rate note (FRN) can have wildly different sensitivities to interest rates, even though both mature on the same date. The fixed bond's price swings hard when rates move, because its coupon is locked in for a decade. The FRN's coupon resets periodically to track the market, so if rates rise, its coupon rises with them — the note barely needs to reprice at all to stay fairly valued.

Why resetting kills duration

Duration measures how much a bond's price moves for a small change in yield. A fixed bond is locked into today's coupon for its entire remaining life, so a rate move changes the value of every future cash flow relative to the new required yield. An FRN's coupon, by contrast, is reset at each period to (roughly) the current market rate plus a fixed spread — so between reset dates, the bond is only exposed to rate risk for the short stretch until the coupon catches up again.

At the instant just after a reset, an FRN paying exactly the market's required rate is worth precisely par, because its next coupon already reflects current rates. All that remains exposed to a rate move is the single short period until the following reset:

$$D_{FRN} \approx t_{reset}$$

In words: an FRN's duration is approximately equal to the time until the coupon next resets — for a note resetting quarterly, that's about 0.25 years, regardless of whether the note matures in 2 years or 20.

Worked example

A 5-year FRN pays SOFR + 0.50%, resetting quarterly, and was just reset yesterday so the next reset is in 0.25 years (using $t=0.25$ as an approximation for its duration).

1. Estimated duration: $D_{FRN} \approx 0.25$ years.
2. Price impact of a 100 bp parallel rate move: using $\Delta P/P \approx -D \times \Delta y$, a 1% (100 bp) rate increase moves price by roughly $-0.25 \times 0.01 = -0.25\%$, i.e., about $2.50 on a $1,000 note.
3. Compare to a 5-year fixed-rate bond with a duration near 4.5: the same 100 bp move would cost roughly $-4.5 \times 0.01 = -4.5\%$, or about $45 on $1,000 — eighteen times the price impact for the same maturity and the same rate shock.

What this means in practice

FRNs are the standard tool for investors who want exposure to credit spread without taking on interest-rate duration — money-market funds, bank treasuries managing asset-liability mismatches, and short-duration credit funds all use them for this reason. The one qualification: an FRN still carries spread duration, sensitivity to the fixed credit spread over the reference rate, which behaves like ordinary duration and is not reset away. Its interest-rate duration is tiny; its credit-spread duration is not.