The table below provides a history of a fixed inco
The table below provides a history of a fixed income security’s coupon rate and the risk free rate over a five-year period:
The security is most likely a(n):
A. step-up note.
B. inverse floater.
C. deferred coupon bond.
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2024-11-14 20:33:20
Ans:B;
B is correct because an inverse floater is a floating-rate security with a coupon formula that actually increases the coupon rate when a reference interest rate decreases, and vice versa. An example coupon formula: coupon rate = 12% - reference rate.
Here the security’s coupon rate moves in the opposite direction (inversely) with the risk free rate. (Specifically: Coupon rate = 12.00% – 2 × Risk free rate.)
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