inverse floater

Inverse floater

Refers to a debt security whose value increases as interest rates rise, i.e. there is a direct price-yield relationship rather than the usual inverse price-yield relationship. In this context, one example of an inverse floater is an IO, the interest-only component of an MBS strip. As interest rates rise, people are less likely to refinance their mortgages, meaning the existing principal in a mortgage pool is more likely to remain intact. In turn, the cash flows on the IOs are more likely to continue. Therefore, as interest rates rise, the IO becomes more valuable, and so its price rises..

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.

inverse floater

A derivative security that has a yield that is inversely related to interest rates. Inverse floaters are one part of a long-term bond. A portion of the bond's current interest income is used to pay money market rates to holders of the regular floating-rate notes. The remainder of current interest and changes in the bond's market value are earned by holders of the inverse floaters. Holders of this type of security can have major losses as a result of increases in interest rates. These securities are used primarily, although not always successfully, by professional portfolio managers.
References in periodicals archive ?
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.
They're risky because they're frequently leveraged, meaning that for every half point change in interest rates, the coupon on the inverse floater could change by a factor of two, three or even four times.
An inverse floater is a type of debt instrument that bears a floating or variable interest rate that moves in the opposite direction to interest rates generally or the interest rate on another security or index.
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.
Leverage consisted predominantly of rated ARPS, with an immaterial amount also invested in an inverse floater of a tender option bond.
One of the more risky CMO tranches is the inverse floater, a type of tranche that pays an adjustable rate of interest that moves in the opposite direction from movements of an interest rate index, such as LIBOR.
9% of the portfolio supporting MWAM 2001-1 consists of investment grade inverse floater (7.
Furthermore, since each inverse floater is uniquely structured and thinly traded, prices used for valuation purposes are determined using theoretical pricing models.
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.
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.

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