What defines a floating rate debt instrument?

A floating rate debt instrument is characterized by interest payments that adjust periodically based on a benchmark interest rate, such as LIBOR (London Interbank Offered Rate) or another market rate. This means that the interest expense for the borrower varies over time and is linked directly to movements in the specified benchmark, allowing the debt service costs to fluctuate in line with market interest rates. This is beneficial in a rising interest rate environment, as the interest expense may increase, but it also carries the risk that the rates could rise significantly, leading to higher interest payments.

In contrast, options like a fixed interest rate instrument maintain the same rate throughout their life, a bond with no interest would not conform to the definition of a debt instrument since it wouldn't provide any returns, and government-fixed interest debt would imply a predetermined rate set by a government authority, which does not equate to the floating nature of variable rates.