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..
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

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.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.
References in periodicals archive ?
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.

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