Inverse Floater

Inverse Floater
A bond or other type of debt whose coupon rate has an inverse relationship to a benchmark rate. An inverse floater adjusts its coupon payment as the interest rate changes. When the interest rate goes up the coupon payment rate will go down because the interest rate is deducted from the coupon payment. A higher interest rate means more is deducted, thus less is paid to the holder. A ratio of the interest rate can also be used instead of one to one relationship. Also known as an inverse floating rate note.

You would want to invest in an inverse floater if the benchmark rate is high and you think the rate will decrease in the future at a faster rate than the forwards show. With an inverse floater, as interest rates fall, the coupon rate rises because less is taken off.

One more strategy is to buy an interest rate floater if the rates are low now and you expect them to stay low, BUT the forwards are implying an increase. If you were correct and the rates do not change, you will outperform the floating rate note by purchasing the inverse floating rate note.

Investment dictionary. . 2012.

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