Floating-Rate Loan

A loan whose interest rate is a reference rate plus a fixed margin, so payments change as the reference rate moves.

Example

A loan at the reference rate plus 6% costs 7% when the reference is 1% and 11% when it is 5%.

Rising rates increase the lender's income and the borrower's burden, which can raise defaults.

Policy rate — The benchmark interest rate set by a central bank, which the rates institutions offer savers and charge borrowers are set with reference to.
Interest coverage — Operating profit divided by the interest charge - how many times over the year's earnings could pay the year's cost of borrowing.
Direct Lending — Loans made directly by non-bank lenders or funds to companies, typically mid-sized businesses, rather than through public bond markets.

A loan's rate is a stack: base rate, expected loss, illiquidity and fees — Private loans are priced by building up from a risk-free rate, adding compensation for defaults, for being unable to sell, and for the intermediary. Values between lending and repayment are mostly estimates. (11 min)