I heard that the last year exam has a item set about inverse floater created from support tranche but I don’t see it anywhere in this year’s Schweser’ books. Is it removed from this year’s curriculum? Also for people who study in CFAI texts, do you notice any “big fish” that Schweser forgot? Thanks!
It is in this years curriculum.
inverse floater on a support tranche, eh? sounds like a bitch… hopefully all the variables spoon fed, and problems straight forward if something like that comes up again
there was one question with inverse floater as one of the answer choices…
This is how you calculate the cap on an inverse floater from a support tranche. Let’s say you have a support tranche of $500,000 notional principle that gets a 6% fixed interest rate. Let’s also assume you split the tranche up into a $450,000 floater tranche of LIBOR + 1% and another separate tranche of the remaining principal, $50,000, and let’s say you need to calculate this interest rate. How do you do it? First take a deep breath. It’s really easy folks. Finquiz had a question on it. Just use simple algebra…and no, I did not get it right, but I will from here on out! Consider this: the weighted interest rate of the floater + the weighted interest rate of the inverse floater = 6% x $500,000 LIBOR + 0.01(450,000) - LIBOR + x(50,000) = 0.06(500,000) 4500 + 50,000x = 30,000 x = 51% If you want a formula for it, try this: k = inverse floater dollar interest due when reference rate (LIBOR, Treasuries, etc) for floater is zero / principal for inverse floater