Fixed rate bonds are the traditional kind of bonds. A bank fixed deposit where I have invested money the interest rate is known for the entire term of the deposit. Similarly there are bonds available in the market where how much the bond will pay throughout the term, let's say 9 percent, 8 percent, 10 percent, whatever it may be is known. That percentage remains constant throughout the term. These bonds are known as the fixed rate bonds because the rate is fixed.
On the other hand there could be a mechanism under which the interest rate the borrower pays on the bonds is subject to change depending on change in the benchmark interest rates.
Bonds are not so popular on the floating side but the home loans are quite popular on the floating rate side. Periodically the interest rate gets reset. The same thing applies in case of bonds also.
Incase of bond floating rates there are a few things, a benchmark rate, a spread which is over and above the benchmark rate or below the benchmark rate, what is the difference that is spread. Third is the reset frequency. At what period one is going to look at the benchmark rate and adjust the interest rate. These are three important things in a floating rate bond.
Between the two we discussed about the interest rates earlier, fixed rate bonds are subject to that interest rate risk. Floating rate bonds protect an investor against the interest rate risk.
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