Assume an inverse floater has coupon of 162LIBOR this 10 mil

Assume an inverse floater has coupon of .16-2LIBOR, this $10 million bond is currently trading at Par and has 5 year to maturity. What is the worst case loss in the event LIBOR increases to 8 percent by the end of year 1?

1) Loss of $2.9 million

2) Loss of $2.65 million

3) Gain of 3.19 million

4) None of the above

Solution

Correct answers is

2) Loss of $2.65 million

Explanation :

Worst case loss in the event LIBOR increases to 8 percent is

=LIBOR rate *(1/1+y)*principal amount*year to maturity remaining

=