Investments

1
Floaters and Inverse Floaters

• Zvi Wiener
• tel [phone] mswiener_at_mscc.huji.ac.il

2
Straight bond
Floater
0 1 2 3 4 5 6 7
3
How to treat Floaters

• Floater is similar to a constantly renewed loan
  with fixed spread (!).
• Thus the yield of a floater is equal to the yield
  on the basis plus the spread.
• Note that some of the Israeli government bonds
  have funny linkage to other bonds.

4
Pricing of AA Floaters

• Years
• 0
• 1
• 2
• 3
• 4
• 5

Cashflow -100 L0 L1 L2 L3 100 L4
Price
100L4
5
Pricing of Floaters

• Years
• 0
• 1
• 2
• 3
• 4
• 5

Cashflow -100 L0D L1D L2D L3D 100L4D
Fair loan -100 L1d L2d L3d 100L4d
Difference ?? D-d D-d D-d D-d
6
Pricing of Floaters

• Years
• 0
• 1
• 2
• 3
• 4
• 5

Cashflow -100 L0D L1D L2D L3D 100L4D
Fair loan -100 L1d L2d L3d 100L4d
Difference ?? D-d D-d D-d D-d
Two types of duration index duration and spread
duration.
7
Reverse (Inverse) Floater

• USD 5 year interest rates are 5, however short
  term interest rates are Libor 2.
• Libor London Interbank offered rate
• on Bloomberg see FWCV currency
• One can construct so-called reverse floater

8
Inverse Floater

• Years
• 0
• 1
• 2
• 3
• 4
• 5

bond -100 5 5 5 5 105
loan 100 -L0 -L1 -L2 -L3 -100- L4
Reverse Fl. -100 8 10-L1 10-L2 10-L3 110- L4
bond -100 5 5 5 5 105
9
Duration of inverse floater

• Inverse Floater 2Bond Floater
• IF 2B - F

10

• See Fabozzi The Handbook of Fixed Income
  Securities, ch. 14, Floating Rate Securities.
• Duration of Floaters, see in T. Bjork, Arbitrage
  Theory in Continuous Time, Ch 15.
• Accrual Range, see Accrual Swaps in Hull,
  Options, Futures, and Other Derivatives Ch. 25