Variable-rate refers to the interest rate on the underlying assets that is not fixed, but rather changes over time in line with market interest rates. In Australian English, variable-rate is sometimes referred to as "floating-rate".
Variable-rate securitisations are more common than fixed-rate securitisations because they offer investors the potential for higher returns. However, they also carry more risk, as the interest payments on the underlying assets can increase if market interest rates rise.
Here are some of the applications of variable-rate securitisations:
- To provide investors with the potential for higher returns: Variable-rate securitisations offer investors the potential for higher returns than fixed-rate securitisations, as the interest payments on the underlying assets can increase if market interest rates rise.
- To reduce the interest rate risk of the issuer: Variable-rate securitisations can help to reduce the interest rate risk of the issuer, as the issuer will not be locked into a fixed interest rate for the life of the securitisation.
- To improve the liquidity of the securitisation: Variable-rate securitisations can improve the liquidity of the securitisation, as they are more attractive to investors who are looking for investments that offer the potential for higher returns.
Variable-rate securitisations are a valuable tool for securitisation. They offer investors the potential for higher returns and can help to reduce the interest rate risk of the issuer.
Variable-rate is sometimes referred to as "floating-rate".