can anyone explain floater, inverse floater and cap rate
let me try original ABS (or MBS?) is 150 mio amount with 10 % interest rate you decide to create floater (F) and inverse floater (IF) say F amount = 100 mio IF amount = 50 mio they must equal to 150 mio (original amount) how you devide it, it is your choice now to define interest rates: 10 % interest rate on 150 mio = 30 % on 50 mio so IF int. rate = 30 % wait, if you pay 30 % to IF, F will not get any interest (should get somthing like Libor) and it should be inverse floater, it looks like fixed rate now (there should be somehting like 30 % - X x Libor so once again IF int. rate = 30 % - X x Libor X x Libor that you dont pay (substract from IF interest) to IF, you dedicate it to F and say that F will receive Libor X x Libor on 50 mio (FL amount) = Libor on 100 mio (F amount) => X = 2 so once again IF int. rate = 30 % - 2 x Libor and F int rate = Libor well usually you add some spread to F int rate on top of Libor to make it more attractive (not sure here but I think it should reflect the risks of the investment), lets say you want to add 1 % so F int rate = Libor + 1% where do you take 1%? from IF, 1 % on 100 mio is equal to 2 % on 50 mio, so you need to adjust IF int. rate = 28 % - 2 x Libor now you know that IF rate cannot be < 0 it means if 2 x Libor goes above 28 % the interest to IF = 0 and all original int of 10 % on 150 mio (original amount) goes to F and it is also maximum F int rate (the cap) 10 % on 150 mio = 15 % on 100 mio so F int rate = Libor + 1 %, max 15 %, min 0 and IF int rate = 28 % - 2 x Libor, min 0, max 28% (crosscheck) Libor cap on F is 15 - 1 = 14 % => 14 x 2 = 28 % = 2 x Libor => IF rate = 0 is this what you asked?