The party receiving the interest is in the same position as one who has sold a series of digital calls struck at the top of the range and digital puts struck at the bottom. Most notes observe the index daily, and some observe monthly or quarterly1.
Consider a hypothetical example in which a note accrues at 3.0% a year inside the range and 0% outside. If 45 of the 60 observation days in a three-month period are inside the range, the interest for that period is 75% of what it would be with all 60 days inside.
The manual that the Board of Governors of the Federal Reserve System wrote for its examiners (February 1998) also describes a form that sells barrier options, where touching the barrier on even one day sets the interest for the whole period to 0. It calls this form quite rare2.