leveraged floater

CFA Level III
#21

i saw a leveraged floater in the men’s room earlier

#22

the inverse floater is next to it.

#23

deriv108 Wrote: ------------------------------------------------------- > Is A the final answer? > > Is this $12 million the notional principal? yes $12 mio is the face value, we do not know the price at which it was issued!!! ref. CFAI text (Volume 5, page around 489)

#24

You need 14.4 Million face value of bonds , but you have 12 Million in cash. There are some issuers that will go for a rate like that . Plus the term is not specified, could be 20 years in which case it will begin to look very reasonable

#25

To create a leveraged floater, the issuer has to set its price higher enough(or with longer term as janakisri said) to cover the liability(to pay 2xLIBOR rate). The issuer can’t do much about the bond(6%) and the swap(-4.4%), and he just uses the two to hedge the risks. I’m not complaining, but CFAI can simply add a line or two to clarify the confusion in the KAT example (P489). I found it was asked in AF every year.

#26

Thanks, pfcfaataf. $12m has to be the NP, o/w, there is no enough info to calculate the net cash flow.

#27

Overall I think this should work: If issue a leveraged floater, buy a fixed bond, receive fixed and pay floating swap. Net payment fixed If issue an inverse floater, buy a fixed bond, pay fixed and receive floating swap. Net payment fixed Provided that for an inverse floater, the floating rate does not increase more than “b” as in “b - F” agree / disagree?