Question

Assume that $15,000,000 in floaters and $5,000,000 in inverse floaters are issued. How does this change the returns for the inverse floater when LIBOR is 2 percent, 4 percent, and 6 percent?

 

Answer 1

See below:

 

Libor	(F) Rate	(IF) Rate	F interest	IF Interest	Total interest
0%	0.00%	24.00%	$0	$1,200,000	$1,200,000
1%	1.00%	21.00%	150,000	1,050,000	1,200,000
2%	2.00%	18.00%	300,000	900,000	1,200,000
3%	3.00%	15.00%	450,000	750,000	1,200,000
4%	4.00%	12.00%	600,000	600,000	1,200,000
5%	5.00%	9.00%	750,000	450,000	1,200,000
6%	6.00%	6.00%	900,000	300,000	1,200,000
7%	7.00%	3.00%	1,050,000	150,000	1,200,000
8%	8.00%	0.00%	1,200,000	0	1,200,000

 

The inverse floater now starts at a higher rate with Libor equal to 0% and decreases at a faster rate than before.