Collared Floating Rate Notes or “CRAN”
A Collared Floating Rate Note is similar to a traditional floating rate bond, but provides the investor with a minimum and maximum coupon rate. Coupons are based on a reference rate, typically the 3-month Bankers’ Acceptance (BA) or London Interbank Offered Rate (LIBOR). The cap rate is the maximum rate to be used for the calculation of interest, even if the reference rate is above the maximum. The floor represents the minimum coupon rate to be used for the calculation of interest, even if the reference rate is below the minimum. The investor will be protected for 100% of principal if the note is held to maturity.
Investor Rationale: Collared Floating Rate Notes protect investors against downside risk and pay a steady coupon payment.
Investor Profile: Clients should expect that interest rates are on the rise, but are unlikely to go above the cap level. If you seek a guaranteed minimum coupon payment, and a coupon that resets to the current short-term market rate within the collar rate range, Collared Floating Rate Notes can be a suitable investment.
Advantages:
- Simple structure
- Minimum Coupon payment
- Increasing Coupon if the reference rate increases
- Less price sensitivity in the secondary market when compared to fixed rate bonds
- Liquidity in daily secondary market / early redemption penalties
Risks:
- Yield is capped at the ceiling (investor will miss out on rates above the upper bound of the cap during a rising interest rate environment)
- Credit Risk of issuer
