Inverse floating-rate note

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Inverse floating-rate note

A variable-rate security whose coupon rate increases as a benchmark interest rate declines.

Inverse Floating-Rate Note

A bond or other debt security with a variable coupon rate that changes in inverse proportion to some benchmark rate. For example, an inverse floating-rate note may be linked to LIBOR; as the LIBOR decreases, the coupon rate increases and vice versa. An inverse floating-rate note allows a bondholder to benefit from declining interest rates. It is also called an inverse floater.
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Inverse floaters can be more volatile than conventional fixed-rate bonds and entail the use of leverage.
With the introduction of more inverse floaters into our portfolio in the last couple of years they've performed exceptionally well with rates declining and then staying low for a particularly long period of time.
With respect to the investment strategy, the Official Statements failed adequately to disclose that the strategy: 1) was risky; 2) was predicated upon the assumption that prevailing interest rates would remain at relatively low levels; 3) involved a high degree of leverage through the use of reverse repurchase agreements; 4) involved a substantial investment in derivative securities, including inverse floaters that are negatively affected by a rise in interest rates; and 5) was very sensitive to changes in the prevailing interest rate because of the leverage.
After the big sell-off following the collapse of that market, some of the more exotic and risky strips, such as inverse floaters, were selling at discounts of up to 26 percent.
The group accused Crews, Hoggard and two out-of-state brokerage firms of being responsible for losses caused by investing BMAA funds in volatile inverse floaters, a type of derivative investment.
He explained that mortgages, convertibles and callables are similar to inverse floaters, leveraged swaps, principal-only strips or step-up callable notes.
Inverse floaters are unusual instruments because their interest coupons float in the opposite direction of interest rates in general.
Previously, the Fund observed policies that prevented it from investing in IOs or inverse floaters of collateralized mortgage obligations or in residual interests of REMICS.
The bulletin also describes the most common types of structured notes, including step-up bonds, index amortizing notes, dual index notes, deleveraged bonds, range bonds and inverse floaters.
This article will focus on other derivative products: inverse floaters/floaters, inverse floaters hedged with swaps, bull/bear floaters and indexed/fixed-rate bonds.
Under normal market conditions, the Fund invests more than half of its assets in mortgage-backed government securities, mortgage-backed securities collateralized by government securities, and privately issued high-grade mortgage-backed securities, including inverse floaters.
Specifically, according to the complaint, the overarching principle of capital preservation was compromised by concentrating large positions in low rated bonds, bonds not reviewed by an independent rating agency and by portfolio concentration in high risk securities including, Tobacco Bonds, Dirt Bonds, and Inverse Floaters.

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