Inverse Floater Rate Receipts (Residual Certificates) Series 2018-XL0092A
The products include an 18-month
inverse floater, a two-year range accrual, a two-year positive averaging carry note, an 18-month collared deposit and an 18-month wedding cake product.
There is an additional risk as well with floater bonds and we utilize a fairly large number of
inverse floater bonds because of the returns and so forth.
If this arrangement, known as an "
inverse floater," sounds complicated, that's because it is.
(Of course, the reverse is also true: A 2 percent drop in LIBOR sends the rate down 4 percent.) With an
inverse floater, an increase in the index decreases the rate on the bond.
First introduced to the municipal market in March 1990,
inverse floaters are considered derivatives because owning an
inverse floater is economically equivalent to owning a fixed-rate bond and writing a fixed-to-floating interest rate swap that contains an interest rate cap.
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 interest rates on "
inverse floaters" move in a direction opposite to the changes in the designated index and offer leverage to investors who believe rates may move down.
First, the reverse repurchase costs would increase and the income that the County Pools earned from the
inverse floaters in the portfolio would decrease, creating lower earnings for the County Pools.
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.