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

Cash management control, I need a report on the topic Cash Management Contr...

I need a report on the topic Cash Management Control. Can you please assist me for Cash Management Control report for about 2500 words?

What is capital budgeting, What is Capital Budgeting Capital Budgeting...

What is Capital Budgeting Capital Budgeting is probably the most financial decision for a firm. It relates to selection of an asset or investment proposal or course of action

Advantage and disadvantage of aggressive working capital, What are the adva...

What are the advantages and disadvantages of the aggressive working capital financing approach? An aggressive working capital financing approach generally results in a lower cost

Currency swap, How exchange of principal and interest in one currency? E...

How exchange of principal and interest in one currency? Expalin

Financial bootstrapping, Briefly describe the major differences between a s...

Briefly describe the major differences between a sole proprietorship and a corporation. Under which form would you choose for a business, and why? Describe the meaning of financi

What is rectification of errors, Principles of Financial Accounting and Man...

Principles of Financial Accounting and Management 1. Define Accounting. Briefly explain the ‘Entity Concept' and ‘Money Measurement Concept' of accounting. 2. What is rectif

Evaluate the revenue and cost, a) TFC = $1,840 (Rent, Salaries, Admin + Pow...

a) TFC = $1,840 (Rent, Salaries, Admin + Power) (b) BEQ = $1,840 / $16 = 115 child places (c) Graph: Title; Axis labels; TR line; TC line and TFC line accurately drawn and la

Excess of the inadequate of the working capital, Every business concern sho...

Every business concern should have neigh adequate capital to run the business operations it should have neither redundant nor excess working capital non inadequate or Shortage of

Assignment, Imagine you have been allocated $100,000 which is to be investe...

Imagine you have been allocated $100,000 which is to be invested in 8 companies listed on the Australian Stock Exchange (ASX). You are required to have a balanced portfolio betwee

Explain should a firm hedge and why or why not, Should a firm hedge?  Why o...

Should a firm hedge?  Why or why not? Answer:  Firms may not need to hedge exchange risk in a perfect capital market. But firms can add to their value by hedging if markets are

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