Floating bonds are bonds whose rates are tied to the market or whose rate of interest is pegged to a benchmark, such as Treasury bill rate and adjusted periodically.
In other words, these bonds are bonds whose interest rates rise and fall with the interest rates in the investment market.
Rising interest rates are enemies of traditional bond and bond funds and can cut right through your bond portfolio.
But do not worry.
There is one kind of bond that will not only protect you from losses but may also enhance your profits provided that you are convinced that the rates will rise.
Nowadays more and more companies or issuers such as Wachovia (NYSE: WB) and General Mills (NYSE: GIS) are issuing floating rate bonds instead of those traditional fixed-rate bonds.
These bonds eliminate the rising risk of the rate of interest.
Traditional fixed rate bonds leave you fully exposed to interest rate risks with dangers of suffering a severe loss of principal if the rates rise in a substantial way.
The reason behind such a severe loss is because as the rates go up you will be earning a lower rate of interest than the prevailing market offers, a situation which forces you to sell your bonds at a discount to their previous value.
This is not the case with floating rate bonds.
As their name implies these bonds pay different rates of interest depending on the prevailing rates in the bond market, so it means that the bonds refer to benchmark rate; the interest payments rise with the rates, but remember your interest checks will go down with the fall in rates!