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

Analyse consumer behaviour, Eatmore & Green Pty. Ltd (Australia) is a succe...

Eatmore & Green Pty. Ltd (Australia) is a successful medium sized marketing consultancy for Australian agricultural products and Australian sourced organic, natural beauty/cosmetic

Difference among currency forward market and futures market, Explain the ba...

Explain the basic differences between the operation of a currency forward market and a futures market. Answer:  The forward market is an OTC market in which the forward contract

Explain traditional method of measurement, Q. Explain Traditional Method of...

Q. Explain Traditional Method of Measurement? Computation of yield to measure a financial asset's return is the simplest and oldest technique of measurement. Yield can be find

Show limitations of profit maximization, Q. Show Limitations of Profit maxi...

Q. Show Limitations of Profit maximization? The Profit maximization criterion is criticized on the following grounds: i) Quality of Benefits: Profit maximization approach ig

Credit policy, What is the Credit Policy? Describe please.

What is the Credit Policy? Describe please.

Working capital management, I need a report on Working Capital Management. ...

I need a report on Working Capital Management. Can you please assist me for Working Capital Management report for about 2500 words?

Identification the management risk, Identification the management risk: ...

Identification the management risk: The first and most essential aspect of risk management is recognising what events may occur within a business.  It is only when all the poss

Acquisition planning and strategy, A c quisition Planning and Strategy ...

A c quisition Planning and Strategy In the previous section, we discussed about the constraints to successful merger integration. In this section, we will learn how to plan a

Define the hirfindahl-hirschman index, What is the Hirfindahl-Hirschman Ind...

What is the Hirfindahl-Hirschman Index? A: The Hirfindahl-Hirschman Index, or HHI, is the standard measure employed by economists to evaluate market concentration. The greater

Alternative dividend policies, The managing directors of three profitable l...

The managing directors of three profitable listed companies discussed their companies' dividend policies at a business lunch. Company A ; has deliberately paid no dividends for

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