Inverse Floater

Derivative instrument whose coupon rate is inversely related to some multiple of a specified market rate of interest. Typically a cap and floor are placed on the coupon. As interest rates go down, the amount of interest the inverse floater pays goes up. For example, if the inverse floater rate is 32% and the multiple is four times the London Interbank Offered Rate (LIBOR) of 7%, the coupon is valued at 4%. If the LIBOR goes to 6%, the new coupon is 8%. Many inverse floaters are based on pieces of mortgage-backed securities such as Collateralized Mortgage Obligations which react inversely to movements in interest rates.

Mortgage backed bond, usually part of a Collateralized Mortgage Obligation (CMO) bearing an interest rate that declines as an index rate, for example, the LIBOR rate, increases. An inverse floater may have a Floor and a Cap. Also called a reverse floater.