Inverse Floater

[satyaa]

Is there a formula for calculating the coupon payments on an inverse floater?

Thanks

 

[CFAHouston]

isn't inverse floater is when there is an inverse relationship with some sort of reference rate?

Ex

20% - 2.5%(LIBOR 90 day rate)

 

[satyaa]

Yes that is how it works. The question i am dealing with is worded as under:

Annual Coupon rate calculated using a constant rate = 8.50%
Multiplier = 2.0
Reference rate = 2.50%
Face value = 5,000

I calculated the coupon payment as = (8.50 - 2*2.5) * 5000 = $175

Was not sure if this is the right way to do.

Thanks

 

[CFAHouston]

Looks correct.

Is this from the Fixed income analysis book?

 

[satyaa]

SchweserPro CD. Right now I am working through it. I don't remember coming across any inverse floater calculation in Schweser notes.

Thanks

 

[zimzim78]

Yeah dude, I never came across any mention of a calculation for an inverse floater (at least using Schweser 2005 materials).

So inverse means we subtract the reference rate?

 

[JoeyDVivre]

It's hard to believe there will be questions on the exam about inverse floaters. Those are pretty obscure bonds..