Floating-Rate Note - FRN

Finance allah shmoop what's the difference between a fixed and

a floating rate All right well we'll just start this

one out with your favorite time Donald and melania need

to borrow money to buy a building here's the history

of ten year t bill costs for the last few

decades Well rates were almost ten percent in the nineteen

seventies and then they fell all the way to being

almost free in two thousand eighteen Well if donald had

borrowed money nineteen eighty to buy a building with us

fixed rate he'd have had to pay about ten percent

interest for all this time That raid in nineteen eighty

was fixed and you know i'd be paying ten percent

for thirty five years very expensive rent on that money

It's not like a dog who can't you know have

pups different kind of fixed you know it's fixes in

he won't move Position is just a set number fixed

in place All right well donald would have overpaid massively

in his loans by paying ten percent interest when he

could have been paying seven percent here and four percent

here And maybe like two percent change here if the

loan he'd taken out in nineteen eighty was floating well

it would have floated downward along the way like that

Well most for floating loans have a preset set of

terms which move along with the rates of the fed

charges to loan money to banks who then mark up

the loans a bit and resell the money to really

borrowers like donald and kill you and me That is

the floating rate might be set at quote the average

federal funds rate plus ah hundred faces points over the

trailing six month period to be reset every month Unquote

Yeah something like that So in this case his rate

would have floated downward And obviously things can go the

other way as well Joe six pack it's a mortgage

for a home he can barely afford today Eight hundred

grand mortgage at four percent Well it cost him thirty

two grand a year to rent that money just the

interest and he has to make principal payments as well

So is total payments or something like forty grand a

year in year one of thirty Well if rates go

back up and they easily could and become say seven

Percent instead of that four percent a few years later

three four five years later Well then all of a

sudden his cost of renting that money goes from thirty

two grand a year in interest costs too something like

fifty or sixty grand a year in interest costs And

joe six pack because he didn't fix his raid at

that four percent figure when he borrowed it let things

float and well he ended up you know living in

his car when he couldn't afford paying The mortgage owns

home anymore and had to sell it And so yeah

he's living in his suv down by the river But 00:02:45.5 --> [endTime] luckily for him that suv floats