Inverse floating rate note

<p>An inverse floating rate note, or simply an inverse floater, is a type of <a href="/facts/Bond_(finance)/qlmpLj0k">bond</a> or other type of debt instrument used in finance whose <a href="/facts/Coupon_(bond)/dEY27Cne">coupon rate</a> has an inverse relationship to short-term interest rates (or its <a href="/facts/Reference_rate/HyW792XV">reference rate</a>). With an inverse floater, as interest rates rise the coupon rate falls. The basic structure is the same as an ordinary <a href="/facts/Floating_rate_note/u7slojL5">floating rate note</a> except for the direction in which the coupon rate is adjusted. These two structures are often used in concert.
</p><p>As short-term interest rates fall, both the <a href="/facts/Market_price/yWQ8edfN">market price</a> and the <a href="/facts/Yield_(finance)/aRohGR9L">yield</a> of the inverse floater increase. This link often magnifies the fluctuation in the bond's price. However, in the opposite situation, when short-term interest rates rise, the value of the bond can drop significantly, and holders of this type of instrument may end up with a security that pays little interest and for which the market will pay very little. Thus, <a href="/facts/Interest_rate_risk/AvRcDbnG">interest rate risk</a> is magnified and contains a high degree of volatility.
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Inverse floating rate note open-in-new

Inverse floating rate note