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

Healthcare Finance, I am trying to make a payment and I can''t seem to get ...

I am trying to make a payment and I can''t seem to get it to go throught on you all site..

How are libor, Q. How are LIBOR, TIBOR and EURIBOR determined? London I...

Q. How are LIBOR, TIBOR and EURIBOR determined? London Inter Bank Offered rate ( LIBOR) and is the rate of interest at which banks offer funds to other banks in marketable siz

Prepare a report for the managing director, The Managing Director of your f...

The Managing Director of your firm is thinking aloud about an appropriate gearing level for the company: "The consultants I spoke to yesterday explained that some theorists adva

Working capital management, Q. Working capital management? Every busine...

Q. Working capital management? Every business needs funds for the two purposes for its establishments and to carry out day to day operations. Long terms funds are required to c

Maximise potential profits and sales, a) A product portfolio is the range o...

a) A product portfolio is the range of products that a business owns or the strategic business units owned by a firm. In bigger firms, like as Virgin, a broad product portfolio mig

Working capital turnover, Definition of 'Working Capital Turnover': A ...

Definition of 'Working Capital Turnover': A calculation comparing the depletion of working capital to the generation of sales over a provided period. This provides some useful

What are financial centers?, Banks and brokerage firms are measured financi...

Banks and brokerage firms are measured financial centers

Sources of funds, What are sources of funds for an assignment?

What are sources of funds for an assignment?

Explain financial management and functional areas , 1.  Discuss the various...

1.  Discuss the various techniques of cash management for an efficient working capital Management. 2.  Discuss the MM Hypothesis of Capital structure and its importance in corpo

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