Inverse floaters, Financial Management

Normally, floater coupon rate moves in the same direction as the reference rate. That is, with an increase in the reference rate, the floater coupon rate also increases and vice-versa. However, in inverse floaters or reverse floaters, the coupon rate moves in the opposite direction of the reference rate. Formula to calculate coupon rate for an inverse floater is

         Coupon rate = K - (L x Reference rate)

Where, K and L are constant values set forth in the prospectus of the issue.

Let us say that K is 25% and L is 3 and the reference rate is 3 months LIBOR, which is at 2.5%.

 

The coupon rate of the reverse floater is determined as follows:

         Coupon rate = 25% - (3 x 2.5%) = 17.50%.

If we assume that the 3 months LIBOR is 3.5%, then the coupon rate for next interest payment period is

         = 25% - 3 x 3.5% = 14.50%.

If the 3 months LIBOR is 1.5%, then the coupon rate for next interest payment period is:

         = 25% - 3 x 1.5% = 20.50%.

From the above illustration, we clearly see how the coupon rates of an inverse floater move with the increase and decrease of reference rates.

Posted Date: 9/8/2012 5:19:21 AM | Location : United States







Related Discussions:- Inverse floaters, Assignment Help, Ask Question on Inverse floaters, Get Answer, Expert's Help, Inverse floaters Discussions

Write discussion on Inverse floaters
Your posts are moderated
Related Questions
Explain the pricing-to-market phenomenon. Answer: The pricing-to-market abbreviated as PTM refers to the phenomenon that similar securities are priced in a different way for diff

What are the assumptions of MM(Modigliani Miller) approach?

Q. Explain about Deferred Payment? suppose a person take a loan of a specified amount at a given rate of the interest. he wants to repay this loan together with the interest in

Is it possible for a company with a positive net income and which does not distribute dividends to find itself in suspension of payments?  Yes. A lot of companies which entered

Internal Rate of Return (IRR) : This rate attempts to find the earnings rate, which equates the current value of the streams of earnings to the investment outlay. IRR is descri


Q. What do you mean by Sarbanes-Oxley? Sarbanes-Oxley (SOX) - Sarbanes-Oxley Act was signed into law on 30 July 2002 by President Bush. Act is designed to oversee the financial

Determine about the Strategic Benchmarking Comparison in terms of an organisations 'strategic choices' made to the most successful market leader for example review organisat

What action(s) should be take place if analysis of pro forma financial statements reveals positive trends?  Negative trends? While analyzing the pro forma statements, managers fre

Suppose the bid-ask spot prices for one British pound are $1.50 and $1.60 respectively. 1. Compute the bid-ask prices for one US dollar in terms of British pound. 2. Suppose