CFA Practice Question

There are 490 practice questions for this study session.

CFA Practice Question

An inverse-floater has coupon rate = 5% + Maximum [(0.60 x (15% - r)) or 0], where r is the six-month LIBOR rate.

A. The cap coupon rate is 20% and occurs when 6-month r = 0%.
B. The floor coupon rate is 5% and occurs when 6-month r >= 15%.
C. The cap coupon rate is 14% and occurs when 6-month r >= 15%.
Correct Answer: B

For all values of six-month LIBOR greater than 15%, coupon rate = 5% + Maximum[(0.60 x (15% - r)) or 0] = 5%.

User Contributed Comments 6

User Comment
finances I don't understand.
krisna When r=15%, the inverse floater's rate = 5% + 0.
Try the formula again, when r >=15% .. the inverse floater's formula will produce rate <5%.
Thus, the floor coupon rate is 5%, holds true when 6-month r >= 15%.
B is correct.
michlam14 when we are dealing with an inverse floater, is the max (cap) and the min (floor) the opposite of a normal floater, ie the floor becomes the cap and the cap becomes the floor?
Emily1119 Sorry i still can't understand: How can we know it is cap or floor?
johntan1979 Cap: minimize r ==> r=0
Floor: maximize r ==> r>=15
jonan203 emily1119:

if you can't see the cap or floor by looking at the equation, graph it in a ti-85 with this formula

y = max{.60(.15 - x, 0)} + .05
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