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Basic Question 2 of 18
An inverse-floater has coupon rate = 5% + Maximum [(0.60 x (15% - r)) or 0], where r is the six-month LIBOR rate.
B. The floor coupon rate is 5% and occurs when 6-month r >= 15%.
C. The cap coupon rate is 14% and occurs when 6-month r >= 15%.
A. The cap coupon rate is 20% and occurs when 6-month r = 0%.
B. The floor coupon rate is 5% and occurs when 6-month r >= 15%.
C. The cap coupon rate is 14% and occurs when 6-month r >= 15%.
User Contributed Comments 6
| User | Comment |
|---|---|
| finances | I don't understand. |
| krisna | When r=15%, the inverse floater's rate = 5% + 0. Try the formula again, when r >=15% .. the inverse floater's formula will produce rate <5%. Thus, the floor coupon rate is 5%, holds true when 6-month r >= 15%. B is correct. |
| michlam14 | when we are dealing with an inverse floater, is the max (cap) and the min (floor) the opposite of a normal floater, ie the floor becomes the cap and the cap becomes the floor? |
| Emily1119 | Sorry i still can't understand: How can we know it is cap or floor? |
| johntan1979 | Cap: minimize r ==> r=0 Floor: maximize r ==> r>=15 |
| jonan203 | emily1119: if you can't see the cap or floor by looking at the equation, graph it in a ti-85 with this formula y = max{.60(.15 - x, 0)} + .05 |
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Learning Outcome Statements
describe common cash flow structures of fixed-income instruments
CFA® 2024 Level I Curriculum, Volume 4, Module 2.