Finance:Coupon leverage
Coupon leverage, or leverage factor, is the amount by which a reference rate is multiplied to determine the floating interest rate payable by an inverse floater.[1] Some debt instruments leverage the particular effects of interest rate changes, most commonly in inverse floaters.[2]
As an example, an inverse floater with a multiple may pay interest a rate, or coupon, of 22 percent minus the product of 2 times the 30-day SOFR (Secured Overnight Financing Rate).[3] The coupon leverage is 2, in this example. The reference rate is the 30-day SOFR.
Risk characteristics
Coupon leverage increases the sensitivity of an inverse floater's coupon payments, and therefore its market value, to changes in the underlying reference rate. A higher leverage factor means that a given movement in the reference rate produces a proportionally larger change in the coupon rate.[4]
Because of this leveraged structure, inverse floaters are generally more volatile than comparable fixed-rate or standard floating-rate instruments. U.S. Securities and Exchange Commission filings commonly describe inverse floaters as investments that entail a degree of leverage and may cause gains and losses to be magnified in response to interest-rate movements.[5]
References
- ↑ "Coupon leverage". Risk Glossary. http://www.riskglossary.com/letters/c.htm. Retrieved 2008-06-18.
- ↑ Marshall, John Francis (2000). Dictionary of Financial Engineering: Over 2,000 Terms Explained. John Wiley & Sons. p. 51. ISBN 0-471-24291-8.
- ↑ "Coupon leverage". DG Commercial Loans. http://www.dgcommercialloans.com/glossary/c/coupon_leverage.html. Retrieved 2008-06-18.
- ↑ "497K". https://www.sec.gov/Archives/edgar/data/909466/000119312520181764/d903749d497k.htm.
- ↑ "497K". https://www.sec.gov/Archives/edgar/data/909466/000119312520181764/d903749d497k.htm.
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