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CFA Level I · CFA Level I Exam · Yield and Yield Spread Measures for Floating-Rate Instruments

An issuer sells a floating-rate note whose coupon is the reference rate multiplied by 0.5, subject to a maximum rate of 6%. Which description of the instrument is most accurate?

The note is best described as a capped floater with a leverage factor below one. The coupon moves in the same direction as the reference rate at half its sensitivity, and the 6% maximum limits the coupon, which benefits the issuer when rates rise.

  1. AA capped floater with a leverage factor below oneCorrect
  2. BA step-up note with fixed coupon increments
  3. CAn inverse floater with a rate floor

Explanation

A coupon of reference rate times 0.5 uses a multiplier below one, which makes it a deleveraged floater. The 6% maximum is a cap. A step-up note has predetermined fixed increases, and an inverse floater has a coupon that moves opposite to the reference rate.

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