Pricing an inverse floater
An inverse floater pays a semiannual coupon of on $100 face (where is the prevailing rate) and redeems $100 at its 5-year maturity. The yield curve is flat at . Rather than model the rate-dependent coupon directly, find a static portfolio of ordinary instruments - plain fixed-rate bonds and par floating-rate notes - that reproduces this exact coupon and redemption, and use it to price the inverse floater. What is its price (in dollars)?
Show hints (2)+
- Match the coupon : the needs 3 short floaters; the needs fixed bonds at the coupon.
- Check the redemption nets to $100, then price each leg - coupon = yield and par floaters both sit at par.
Answer
Reveal answer →Final answer
100
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