Floating rate tranches are included on P390 of Volume 5 in the CFAI Curriculum. But they aren’t mentioned in SchweserNotes book 4. Why is that?
No idea, The formula isn’t too difficult to remember. Would be shocking if there is a question about calculation though, considering the size of material in proportion to this question. My guess if there was a question it would be conceptual.
Even though Floating rate tranches(Reading 55) are omitted in Schweser, i think that they are still fair game, just like Treynor Black some years ago. Is anyone going to study this part?
All that I remember up to this point is that there needs to be an inverse floating tranche for every floating tranche in the structure. In addition, I think the inverse floater needs to be twice the amount of the floating, or vice versa.
Inverse floaters leverage is related to the amount of size of the remainder interest of the floating rate tranche. Size of extra interest = 50MM * 7.5 Generally there is leverage involved to raise the cap. You could have equal size of tranches of: Floating 1 = Libor + 50 bps 25MM Cap at 7.5 Inverse Floating 1 = 7.0 - Libor 25MM
Sorry bad example for 50mm double numbers. Meant 25MM * 7.5% extra interest.