Yield and Yield Spread Measures for Floating-Rate Instruments

Prior lessons covered pricing, yields, and spreads for bonds with fixed coupon rates and times-to-maturity of one year or longer. The next two lessons broaden the discussion to include instruments with variable rather than fixed coupons, known as floating-rate instruments, and those with original maturities of one year or less, known as money market instruments. Both types of instrument are important for investors and issuers. Floating-rate instruments, by adjusting cash flows to changes in interest rates, bear less price risk than fixed-rate instruments and are used to hedge certain exposures and to match asset and liability cash flows. Most loans are floating-rate instruments. Money market instruments are a significant source of short-term financing for many types of issuers. A short time-to-maturity means that investors can reinvest and issuers can refinance relatively quickly, which reduces interest rate risk.