In this example, a Floor Security has:
Strike Rate of 8%
Underlying Index on the Cap Contract is LIBOR
Index Offset of 250 basis points
The security Resets on January 1, April 1, July 1, and October 1.
Rates are as follows.
Rate Reset Date | Coupon Rate | Index Offset | Total Rate |
|---|---|---|---|
1-Jan | 6.0 | 2.5 | 8.5 |
1-Apr | 5.0 | 2.5 | 7.5 |
On January 1, Eagle Accounting compares the All in Rate (Total Rate), which is 8.5%, against the Strike Price of 8%. Because the security is a Floor contract and the All in Rate is greater than the Strike Price, Eagle Accounting accrues 0.00% for the period.
In the quarter starting April 1, the All in Rate is less than the Strike Rate. Therefore Eagle Accounting calculates a coupon rate using the following formula:
Strike Rate - All in Rate = Coupon Rate, or 8.0% - 7.5% = .5%
Inverse Floaters act in the similar manner with the following exception: the All in Rate is calculated using this formula:
All in Rate = Inverse Floating Rate - (Coupon Rate from the underlying security + Index Offset) * Inverse Multiplier
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