Floating-rate securities have a coupon rate that resets periodically. The objective of this floating mechanism is to bring the coupon rate in line with the current market yield so that the bond sells at or near its par value, reducing interest rate risk compared to that of a fixed-rate security.

In general, the longer the time until the next reset, the greater the interest rate risk of the floating-rate security. The interest rate risk of a floating-rate security decreases as the reset date approaches because the coupon reset will return the price to par, as long as the margin above the reference rate accurately reflects the bond’s risk. If this fixed margin does not reflect changes in the issuer’s creditworthiness, the bond’s price may differ from par at its reset date.