Reverse floater, inverse floater and bull floater (also used in German; sometimes also reversed floater)

Special form of floating-rate (interest-bearing) security in which the interest yield is negatively correlated with the reference interest rate, i.e. moves in the opposite direction to it (a structured note where the rate of interest paid to the holder of the instrument varies inversely with changes in a certain reference interest rate). – The interest income is determined by subtracting the base or reference interest rate from the fixed interest rate specified in the bond conditions. In Europe, the prime rate is usually EURIBOR or LIBOR. – Reverse floaters usually have a higher interest rate than standard floaters. As a result, a change in the prime rate causes much greater price fluctuations on the stock market than is the case with normal securities. In the case of standard reverse floaters, fluctuations (oscillations) are assumed to be about twice as high. – Even more speculative (involving much more risks) are forms with a double rate. Here, the volatility is three times higher than that of the normal floaters. The investment is particularly worthwhile when interest rates are expected to fall and should be sold near the lower market rate. However, since the interest rate is based on short-term interest rates, but the price movement is based on the long-term market interest rate, the risk for an investor is particularly high when the long-term market interest rates are about to rise; even if the short-term ones should (still) fall. – See bond, floating rate, bond, rising rate, euro bonds, floater, floor, rollover loan, debt security, floating rate, stepdown bond.

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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
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