Floored Floaters - Structured Products

Floored Floaters are capital guaranteed products falling in the range of the fixed income asset class. They pay a yearly, semi-annually or quarterly coupon that is linked to an economic variable such as the 3-month LIBOR (London Interbank Offered Rate). In addition, if the economic variable is lower than a predefined floor, then that floor determines the level of the coupon.

If the prospects favour a rising interest rate scenario, fixed-coupon bonds are not recommendable, because the price of such bonds would fall. On the other hand, floating rate bonds often yield very small coupons because of the link to the short term-rates, which are typically lower than the long term rates (in a normal rising yield curve environment). As such, floored floaters are ideal instruments in a rising rate scenario. They pay a minimum fixed coupon of X%, and a variable rate + Y% if the latter is higher than the former.

These products became quite popular in the wake of the financial crisis in 2009, as the issuer’s funding rate reached unprecedented highs and investors looked for higher income than the low “risk-free” rates yielded. If an investor was willing to take a particular issuer‘s risk, then he could generate a huge outperformance compared to money-market instruments.

Classical Variants

  • Capped Floored Floater: same as Floored Floater, but the coupon cannot increase past the cap.

  • Ratchet Floored Floaters: same as floored floater, but the coupon cannot decrease below the highest coupon already paid.

  • Leveraged Floored Floaters: same as floored floater, but the minimum coupon that is linked to the short-term rate (eg. LIBOR) has a leverage factor. For example, Min. 3% or 1.5*LIBOR.

12 views0 comments

Recent Posts

See All