Dula Indexed Floater Bonds

A DUAL-INDEXED FLOATER is a floating rate Agency bond whose coupon is reset using a COMBINATION of two indexes, one subtracted from the other, and then adding some number of basis points. One is a long term index the other a short term index.

Example: coupon=(10 year Treasury Rate MINUS 1 month Libor)+250 Basis Points If the 10 year Treasury is 6% and 1 month Libor is 3% coupon= (6%-3%) + 2.50% = 5.50%

The key to a DUAL-INDEX floater is the basis point spread between the two indexes. In our above example, the difference between long term rates (the 10 year Treasury Rate) and short term rates (the 1 month Libor) is 3%. If the yield curve “flattens” and this spread “tightens” then the coupon on the floater will go down:

Example: 10 year CMT goes up to 7% and 1 month LIBOR goes up to 4.50% (long term rates up 100 Bps, and short term rates up 150 Bps) coupon = (7%-4.50%)+2.50%=5%

In this scenario, the general level of interest rates has gone up but the Dual-Indexed Floater’s coupon has gone down, because the yield curve has flattened. If the yield curve becomes more steep (the spread between the two indexes becomes greater), then the coupon on a Dual-Indexed Floater will go up. In effect, this floater’s coupon is a reflection of “steepness” of the yield curve more than a reflection of the general direction of interest rates. For this reason, DUAL-INDEXED Floaters are sometimes called Yield Curve Anticipation Notes (“YCANs”).

Inverse Floater Bonds

An INVERSE FLOATER Agency debenture is also a bond whose coupon rate will float with the market.

As the name implies, an Inverse Floater’s coupon moves in the opposite direction of the index. Simply put, if the general level of floating coupon is accomplished in one of two methods. First the coupon will be set by subtracting an index from a fixed rate:

Example: Coupon= (14%-1 mo. LIBOR) If the Libor rate is 3.00% coupon=14%-3%=11% If the Libor rate goes UP to 4% coupon=14%-4%=10%

As you can see the general level of interest rates is rising but the coupon on this Floater is going down, hence the name “Inverse Floater”. The other method of generating an Inverse Floater’s coupon is by multiplying an index against a negative # (called a negative multiplier) and adding some number of basis points. For example:

Example: coupon = (-1.5*1 mo. Libor) + 1500 Basis Points If the Libor rate is 3.00% coupon = (-1.5*3.00%)+15.00%=10.50% If the Libor rate goes UP to 4.00% coupon = (-1.5*4.00%)+15.00%=9.00%

Again, the general level of interest rates is rising but because of the negative multiplier, the coupon of the Inverse Floater’s interest rate is going down.

Government Agency Bonds

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