Frequently Asked Questions on Floating Rate Notes (FRNs)

What action did Treasury announce on July 31, 2013?

Treasury published amendments to its Treasury marketable securities auction rules to accommodate the auction and issuance of Floating Rate Notes (FRNs). These securities will complement Treasury’s existing suite of securities, which include Treasury bills, notes, bonds, and inflation-protected securities (TIPS).  Treasury’s introduction of FRNs will provide a number of benefits, including assisting Treasury in managing the maturity profile of the nation’s marketable debt outstanding, expanding Treasury’s investor base, and helping to finance the government at the lowest cost over time.

What is an FRN?

An FRN is a security that has an interest payment that can change over time.  As interest rates rise, the security’s interest payments will increase.  Similarly, as interest rates fall, the security’s interest payments will decrease.

Why are you issuing FRNs?

FRNs will add a new level of diversity to Treasury’s existing suite of securities, thus providing Treasury debt managers with additional capability to expand the Treasury investor base and extend the weighted average maturity of marketable debt outstanding.  Moreover, Treasury believes that the issuance of FRNs will contribute to the mission of financing the government at the lowest possible cost over time.

Would FRNs pose additional risk to the Treasury if interest rates rise?

FRNs pose similar risks to Treasury as Treasury bills.  For example, an FRN that allows the interest payment to change on a weekly basis would expose Treasury to the same interest rate risk as issuing a series of weekly Treasury bills.  However, FRNs allow Treasury to better manage its debt by issuing securities with longer maturities than Treasury bills.

What will be the index for FRNs?

Treasury FRNs will be indexed to the most recent 13-week Treasury bill auction High Rate, which is the highest accepted discount rate in a Treasury bill auction.

How does the two-day lockout period work?

For purposes of calculating auction settlement amounts and quarterly interest payments, floating rate notes will initially have a two-business-day lockout period prior to their auction settlement date or an interest payment date.  Therefore, a 13-week Treasury bill auction whose rate becomes effective during the lockout period will be excluded from the calculation of accrued interest for purposes of determining that settlement amount or interest payment. Any changes in the index rate that would otherwise have occurred during the lockout period will occur on the first calendar day following the end of the lockout period.

Will the issuance of FRNs replace Treasury bills?

No, we will continue to issue Treasury bills.

How often will FRNs pay interest?

Treasury FRNs will pay interest quarterly.

Will you use the same auction process as for other Treasury marketable securities?

Yes — the bidding process, the minimum and maximum purchase and award amounts, and the award methodology are the same.

When will Treasury hold the first FRN auction?

Treasury expects to hold the first FRN auction in January 2014.