Floating rate notes (FRNs) have interest rates tied to benchmark rates such as SONIA or SOFR. Which statement is true?

• A. They pay interest at the benchmark rate plus a margin
• B. They pay a fixed coupon
• C. They never pay interest
• D. They mature quickly after issuance

Answer: (A)

Floating rate notes set their coupon as the current reference rate plus a fixed margin. The reference is a short-term benchmark like SONIA or SOFR, and the margin (a spread) is agreed at issue. On each reset date the coupon is recalculated using the new benchmark level, so payments move with prevailing rates. This structure ensures investors receive interest that mirrors current funding costs, with the margin compensating for credit risk and liquidity. That’s why the true statement is that they pay interest at the benchmark rate plus a margin. They do pay interest (not a fixed coupon), and the maturity length is independent of the coupon mechanism, so nothing about maturing quickly applies.