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

Difference between mortgage bond and a debenture, Difference between mortga...

Difference between mortgage bond and a debenture? A mortgage bond is a secured bond whereas a debenture is an unsecured bond.

Sources of return, When an investor invests in fixed income sec...

When an investor invests in fixed income securities, he receives returns from one or more of the following sources: Coupon Interest payment.

Share price movements, The management of Nelson plc wish to estimate their ...

The management of Nelson plc wish to estimate their firm's equity beta. Nelson has had a stock market quotation for only two months and the financial management feels that it would

Caselet 2, Suggestion regarding Credit limit. Should it be approved or not,...

Suggestion regarding Credit limit. Should it be approved or not, what should be the amount of credit limit that electronics give to Booth Plastics.

Calculate the average interest rate , At the end of 1922, your great grandf...

At the end of 1922, your great grandfather (g.g.f.) established a trust fund to be used in order to help a later generation of the family obtain a university education. The ultimat

Secured lbo financing or asset-based lending, Secured LBO Financing or Asse...

Secured LBO Financing or Asset-Based Lending Under asset-based lending, the borrower pledges certain assets as collateral. Asset-based lenders look at the borrower's assets as

Investor’s considerations -financial market, Investor's Considerations ...

Investor's Considerations As mentioned above, every investor before taking an investment decision, must consider the following aspects: Risk: The primary consideration for t

What is adjusted basis, Q. What is Adjusted Basis? Adjusted Basis - Aft...

Q. What is Adjusted Basis? Adjusted Basis - After a taxpayer's basis in property is determined, it should be adjusted upwardto include any additions of capital to the property

Operating cycle, make an cash conversion cycle of cabbages

make an cash conversion cycle of cabbages

Explain financial ratio, What is a financial ratio? A financial ratio i...

What is a financial ratio? A financial ratio is a number that denotes the value of one financial variable that is relative to another.  Put much more simply, a financial ratio

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