Even though buying a 2-year US Treasury Note was never a big risk, investors did face the risk of watching interest rates rise right after they buy. Buying new T-Bills every single week at auction is totally impractical for retail investors. Luckily, the Treasury now sells a floating-rate debt security whose interest rate re-sets each week based on the yield established through the weekly T-bill auction. Investors now don't have to worry if interest rates go up each week if they own a Floating-Rate Note, or FRN, since investors will receive whatever rate is established each week for 13-week Treasury Bill yields. The key facts on Floating-Rate Notes or FRNs include:
- Interest payments on FRNs rise and fall, based on discount rates for 13-week bills.
- FRNs are sold in increments of $100. The minimum purchase is $100.
- FRNs are issued in electronic form.
- You can hold an FRN until it matures or sell it before it matures.
- In a single auction, a bidder can buy up to $5 million in FRNs by non-competitive bidding or up to 35% of the initial offering amount by competitive bidding.
Floating-Rate Notes or FRNs provide liquidity and protection against capital risk/default risk, and interest-rate risk.
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