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.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
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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 fund's management team said it believes that increasing the Fund's flexibility to invest in IOs, inverse floaters and residual interests of REMICs may better permit the fund to react to changes in interest rates and to capitalize on the management team's views on the housing and mortgage markets.
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.
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.
Much of the resulting media coverage focused on the fund's investments in derivatives, including asset-backed securities called "inverse floaters" (whose contractual interest rates float inversely with market interest rate changes).
Take, for example, that breed of collateralized mortgage obligation known as "inverse floaters." Issued by a federal agency with a short average maturity and typically a very high yield, it certainly sounds safe enough.
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.

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