A floater and inverse floater and their underlying collatera

A floater and inverse floater, and their underlying collateral have respectively, duration of .5 year ? and 12 years. All bonds are currently at par, and leverage factor is equal to 4. Suppose LIBOR increases by 1 percent. What happens to price of Inverse floater?

Question options:

1)

2)

3)

4)

Solution

An inverse floater is a floating-rate instrument whose interest rate moves inversely with market interest rates

Percentage change in Value of inverse floater = (fixed rate bond- floating rate bond) /total rate

=(4-1)/4+1

=3/5

60%

Hence correct answers is 3 i.e: decreases by 60 percent