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Question
An FI has purchased an agency security that is an inverse floater at 9 percent minus LIBOR. Which of the following characteristics reflect this type of asset?
A. If LIBOR is 4 percent, the asset will pay 5 percent to the investor.
B. As LIBOR increases, the investor will receive a lower return on the security.
C. The agency issuing this security may convert it into a LIBOR liability by entering into a swap agreement.
D. If the FI funded the asset at LIBOR, and LIBOR reaches 10 percent, the FI will have a negative 10 percent spread on the asset.
E. All of the above.
Answer
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