Inverse Floater

A situation in which you clearly should have flushed twice.

Er, okay. An inverse floater is a debt instrument whose stated interest rate is inversely related to some benchmark. Like, LIBOR might be set at 4% today, and our inverse floater bond might also be set at 4% today.

But then whoever runs the Fed in Britain decided to raise LIBOR 25 basis points, so now it’s at 4.25%. Our inverse floater would then go the inverse direction, i.e. float the other way, to be paying 3.75%.

Typically, the rates on inverse floaters would be set and reset on some standard interval...like quarterly, or twice a year. The actual coupon itself, or stated interest rate, can simply change, and the capital markets will adjust to value the bond however they want to.

When the reference rate goes up, the coupon rate will go down, given that the rate is deducted from the coupon payment. A higher interest rate means more is deducted, meaning less is paid to the debtholder. Similarly, as interest rates fall, the coupon rate increases, because less is taken off.

So yeah. It’s always important to keep track of what’s going up and what’s going down...especially when you’ve got company coming over.