Supposed for an inverse floater which has a floor rate of 1%:

Coupon Rate = 4% - (2 x 3-month treasury bill rate)

Now suppose we want to calculate coupon rate as on Oct 5, 2021. The 3-month treasury bill rate as on Oct 5, 2021 = 2.25%. What is the coupon rate?

A. -0.5%
B. 0%
C. 1%

Correct Answer: C

There is a floor imposed on coupon rate, i.e. coupon rate cannot fall below its floor rate of 1%. Furthermore, the inverse floater also comes with an inherent cap, i.e. if the reference rate becomes zero, the fixed rate becomes the cap rate. In the above example, the cap rate is 4%.