Fixed vs. Floating RateSome background helps

The same borrower, the same maturity, two completely different risks. Which one is safer depends on what you are trying to protect, and the answer inverts between borrower and lender.

What each one fixes and what it leaves open

• Fixed rate fixes the cash flow and leaves the value open. You know every payment; the present value of those payments moves with rates, and that movement is duration.
• Floating rate fixes the value and leaves the cash flow open. The price stays near par because the coupon resets; what you actually receive or pay changes every period.
• Neither is safe. They are safe in different dimensions, and choosing between them is choosing which uncertainty you would rather carry.
• The choice inverts between the two sides. A borrower who fixes has certainty of payment; a lender who fixes has certainty of income and full price risk.

The lender's view

• An FRN is not risk-free; it has swapped one risk for another. Price stability is bought with income uncertainty, and income uncertainty is the risk that matters to anyone spending the income.
• Credit spread duration remains even on an FRN. The reference rate resets; the spread over it does not. A note paying reference + 200bp still loses value if the market decides that issuer is worth reference + 400bp — measurable with the spread duration calculator.
• This is the single most misunderstood point about FRNs: they have almost no interest-rate duration and full credit-spread duration.

The borrower's view, which is the mirror image

• Fixing removes payment uncertainty and locks in whatever the market's expectation of future rates was on the day, plus a term premium.
• Floating means the payment tracks the policy rate — cheaper when rates fall, and rising exactly when the broader economy is under pressure, which is when it is hardest to absorb.
• A fixed borrowing has a break cost. Repaying early when rates have fallen means compensating the lender for the below-market rate they lose — a real cost that is invisible until it applies.
• The correlation is the real argument. If your income falls when rates rise, floating stacks two risks on top of each other. If your income rises with rates, floating is a partial hedge.

What the market has already priced

• The fixed rate on offer is roughly the market's expected path of floating rates, plus a term premium. You are not choosing between "high" and "low"; you are choosing whether your outcome differs from the market's expectation.
• The forward curve makes this explicit — the forward-rate calculator extracts what is already implied. Choosing floating because "rates will fall" only pays if they fall more than the curve already says.
• The swap market converts one into the other at a price, which is why the choice is rarely permanent for anyone with access to it — see interest-rate swaps.
• The term premium is a real, if variable, extra in the fixed rate. It compensates the lender for duration and is the reason a long fixed rate typically sits above the average of expected short rates.

Reference rates: the mechanics changed

• Older FRNs referenced forward-looking term rates set at the start of a period, so the payment was known in advance.
• Most modern ones reference an overnight rate compounded in arrears, so the payment is known only at the end of the period. Economically similar, operationally different, and worth checking on any actual note.
• The spread adjustment matters on legacy instruments, where a fixed adjustment was added to bridge the old and new conventions.
• The lookback and observation-shift conventions are in the terms and change the exact number — see the conventions reference.

Choosing, honestly

• Match the rate type to the liability, not to the forecast. A known future payment argues for a fixed asset; an obligation that itself floats argues for a floating one.
• Ask what happens to your income in the scenario where rates move against you. If your income and your payments move together, floating is cheaper insurance than it looks; if not, fixing buys real protection.
• Do not treat floating as "no risk". It has near-zero rate duration, full credit-spread duration and full income uncertainty.
• Do not treat fixed as "locked in". The cash flow is locked; the value is not, and if you may sell early the value is what you get.
• Quantify both with the duration calculator and the carry-and-roll calculator before choosing.