Suppose you are a trust that holds a 10% fixed income security with a face a value

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Suppose you are a trust that holds a 10% fixed income security with a face a value of 200K. Using this bond as a collateral if you want to create

i) a variable-rate demand note (VRDN), the short term "floater", that offers a coupon rate of 1-month LIBOR + 2% and has a face value of 70% of the collateral, and

ii) an inverse floater that offers a coupon rate of X -1 -month LIBOR and has a face value of 30% of the collateral, at what % you must set X?

Assume, an initial 1-month LIBOR rate of 2% and a floor of 0% for the inverse floater.

Related Book For answer-question

Money Banking and Financial Markets

ISBN: 978-1429244091

2nd edition

Authors: Laurence M. Ball

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Posted Date: Mar 11, 2020 08:00 AM

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Suppose you are a trust that holds a 10% fixed income security with a face a value

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Coupon rate 3334 Explanation 70 of collateral 70 200k 140k PV of 70 of collater... View the full answer

Money Banking and Financial Markets

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