What is the difference between fixed-rate bonds and floating-rate bonds?

Fixed-rate bonds and floating-rate bonds have distinctly different characteristics when it comes to interest payments. Fixed-rate bonds offer investors a predetermined interest rate that remains constant throughout the life of the bond. This means that regardless of how market interest rates fluctuate, the bondholder will receive the same interest payment, providing a sense of stability and predictability.

On the other hand, floating-rate bonds have interest rates that are variable and typically adjust at set intervals based on a benchmark interest rate, such as LIBOR or the prime rate. This means that as market interest rates rise or fall, the interest payments on floating-rate bonds will also change, reflecting current market conditions. This adjustment can lead to increased interest income when rates rise, but it can also result in lower payments if rates decrease, introducing an element of risk compared to fixed-rate bonds.

Understanding this distinction is crucial for investors when assessing risk and yield in their fixed income portfolios.