Inverse floaters, Financial Management

Assignment Help:

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.


Related Discussions:- Inverse floaters

Operating economics, Q Operating economics A number of operating econo...

Q Operating economics A number of operating economies will be available with the merger of two or more companies. Duplicating facilities in accounting purchasing marketing etc

Explain difference among the discounted free cash flow model, Explain the d...

Explain the difference among the discounted free cash flow model as it is applied to the valuation of common equity and as it is applied to the valuation of whole businesses. The

Agency relationships, conflicts between shareholders and government in agen...

conflicts between shareholders and government in agency relationship

COST OF CAPITAL, cost of capital, Financial Management The Nu-Nu Brothers I...

cost of capital, Financial Management The Nu-Nu Brothers Inc. (NNBI) has the following capital structure, which it considers to be optional: Debt 25% Preferred Stock 15% Common Equ

What is risk mitigation and how it is monitored, Q. What is Risk mitigation...

Q. What is Risk mitigation and how it is monitored? 1. When managing risks, there are several risk strategy options to be considered. Risk may be avoided entirely, transferred

Define double-entry bookkeeping, Q. Define Double-Entry Bookkeeping? Do...

Q. Define Double-Entry Bookkeeping? Double-Entry Bookkeeping - Method of recording financial transactions in that every transaction is entered in two or more accounts and inclu

Lease, Lease A lease is a contractual arrangement allowing one party th...

Lease A lease is a contractual arrangement allowing one party the use of some exact assets for a specific times period in exchange for a payment it is same as a rental arrangem

Market condition affecting cost of capital, Q. Market condition Affecting c...

Q. Market condition Affecting cost of capital? Market condition: if an investor is purchasing a security where the risk of the investment in significant the opportunity for add

Panera bread company, Analysis of the financial statements and accounting p...

Analysis of the financial statements and accounting policies of "Panera" Bread company, in APA format, containing: Financial Statements -Discuss the main financial statemen

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd