Question
4. Assume that the formula for the coupon rates of a floater and an inverse floater are: Floater coupon rate: reference rate + 2.15% Inverse
4. Assume that the formula for the coupon rates of a floater and an inverse floater are: Floater coupon rate: reference rate + 2.15% Inverse floater coupon rate: 12.5% - reference rate Suppose the $100 million of the bond is used as collateral to create a floater with par value of $50 million and an inverse floater with a par value of $50 million, answer the following questions: (3 points)
(1) What is the coupon rate of the fixed rate collateral for these two floating rate bonds?
(2) Suppose the floor for the inverse floater is 1.25%. What would be the cap of the floater?
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