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.
Texas Instruments BAII Plus Professional Financial Calculator (Google Affiliate Ad)
0 comments:
Post a Comment